Waste Management: Your One-Stop Shop For Waste And ESG Equity Needs
Summary
- Waste Management's revenue is comprised of five main business segments: collections, landfill, transfer, recycling, and other.
- The company has experienced strong revenue, EBITDA, and operating cash flow growth over the last ten years due to smart investments, acquisitions, and innovations on the part of management.
- It has a bright future and demands a premium compared to its peers; however, at $112.71 a share, the premium currently demanded is too high.
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Overview of WM Business
Waste Management (NYSE:WM) was founded in 1968, and over the last 51 years has grown into one of the largest environmental and waste services companies in North America. Waste Management operates in North America across 17 different customer zones (please see image below) - 15 in the United States and 2 in Canada.
As of Q4 2019, Waste Management's revenue is split into five main categories:
Source: Author
1. Collection: Approximately 20,000,000 customers
At approximately 53% of revenues, collection stands apart as Waste Management's largest revenue segment. The collection segment of Waste Management's revenue refers to the transportation of solid waste and recyclables to either a landfill, transfer station or material processing facility. With a diverse pool of customers across multiple industries, collection revenue has provided a compound annual growth rate (CAGR) of 2.19%.
| Annual Report (Calendar Year) | Total Collection Revenue |
|---|---|
| 2010 | $ 8,247,000,000 |
| 2011 | $ 8,406,000,000 |
| 2012 | $ 8,405,000,000 |
| 2013 | $ 8,513,000,000 |
| 2014 | $ 8,507,000,000 |
| 2015 | $ 8,439,000,000 |
| 2016 | $ 8,802,000,000 |
| 2017 | $ 9,264,000,000 |
| 2018 | $ 9,724,000,000 |
| 2019 | $ 10,240,000,000 |
Collection revenue is comprised of four different streams:
- Commercial: 41% of 2019 total collection revenue
Mid-sized businesses which typically sign-up for 3-5 year service agreements. Commercial, as of Q3 2019, has approximately 1,000,000 customers.
- Industrial: 28% of 2019 total collection revenue
A combination of manufacturing waste (recurring) and construction waste (temporary) contracts. Industrial collection had approximately 200,000 customers as of Q3 2019.
- Residential: 26% of 2019 total collection revenue
Residential consists of individual waste collection and larger municipal contracts. These contracts can run between 3-10 years in length and as of Q3 2019 serviced approximately 18,300,000 customers.
- Other: 5% of 2019 total collection revenue
Unspecified collection revenue serving at least 500,000 customers as of Q3 2019. (Waste Management only comments that including Other, collection customers are over 20,000,000.)
Source: Author Using Annual Reports 2012 | 2014 | 2016 | 2018 | 2019
2. Landfill: 249 Owned/Leased
Waste Management's 249 landfills are strategically placed across the United States and Canada. This network, according to the company's May 30, 2019, Investor Day presentation, makes up the largest landfill network in North America. Landfills are not easy to get approved for construction, mainly due to residential communities generally being averse to having them near their homes. This provides a significant "moat" against future competition in the landfill space. Many of Waste Management's collection competitors are forced to pay the company to use its landfills due to the lack of other options and the difficulty in constructing new landfills. I find it hard to see this trend changing anytime soon. Especially since Waste Management's current landfill capacity, although estimated to decline over the next five years, is still strong into the near future.
Interestingly, Waste Management has reduced the number of landfills it operates since 2010, from 271 to 249 in Q4 2019. However, as shown in the below chart, landfill revenue has continued to trend upward at a CAGR of 4.24% since 2010. Revenue per landfill, across the same period, has increased at a CAGR of 5.12%. As discussed further in the next section, this is due in large part to Waste Management's increasing reliance on transfer stations, which cut down on costs and allow less overhead. Transfer stations have increased from 286 in 2010 to 302 in Q4 2019, an increase of 5.30% versus landfills decreasing 8.12%.
Source: Author Using Annual Reports 2012 | 2014 | 2016 | 2018 | 2019
3. Transfer Stations: 302 Owned/Leased
Transfer stations are strategically placed between Waste Management's material recovery and landfill sites. Its transfer stations compress the solid waste into compact, extremely dense blocks which are then, either by rail or trucks, transferred to their material recovery or landfill sites. For a fee, other solid waste haulers can also utilize these transfer stations. Transfer stations allow Waste Management to facilitate customers in areas where they would be unlikely to receive the federal and state zoning permits required for a landfill. Transfer stations are also significantly less expensive to operate than landfills, and therefore, they allow for significant reductions in expenses without limiting the company's ability to operate in different areas of North America. There are many other benefits to Waste Management's reliance on transfer stations, including, but not limited to, less environmental costs, concerns, and liabilities, as well as a bonus to local community relations that come from jobs without the blight that many consider a landfill to be on their community.
The number of transfer stations the company owns and leases has increased from 286 in 2010 to 302 at the end of Q4 2019. This same period saw a CAGR of 3.28% in revenue derived from transfer stations and a CAGR of 2.27% in revenue per transfer station, despite the increase in individual transfer stations of 5.59% since 2010.
Source: Author Using Annual Reports 2012 | 2014 | 2016 | 2018 | 2019
4. Recycling: 103 Owned/Leased Material Recovery Facilities
The recycling division of Waste Management is comprised of three different operations:
- Material Recovery Facilities
As of Q4 2019, Waste Management operates 103 material recovery facilities. As the name suggests, this is the end destination for the recycling component of its collection and transfer station operations.
- Commodity Sales
Many different types of material are recovered at Waste Management's material recovery facilities; some common examples are glass, paper, metals, and plastics. However, the recycling stream does not come in a one-size-fits-all package, there are many different grades. The grade the recovered material is classified as depends largely on the degree of contamination or damage the recycling batch contains and the quality of the product recycled. Different grades demand substantially different prices - paper, for example:
Source: Recycling Today September 3, 2019 article, "Prioritizing movement over price"
- Brokerage Services
Due to Waste Management's experience, connections, and infrastructure for selling recycled material, the company also provides the service to other recyclers who need to move their reclaimed commodities.
Waste Management, unfortunately, does not breakdown the recycling division's revenue, so, unfortunately, I was unable to gauge how well each individual division is doing. I do believe, however, that it is reasonable to assume that the majority of its revenue is derived from the commodity sales division. This business segment is highly cyclical, as seen in the below chart, and does substantially better in a booming economy when price and demand for commodities are high. The price for commodities, especially recycled commodities, has slumped over the last seven years, especially since China, in July 2017, announced a ban on the import of 24 different types of foreign waste. Therefore, unsurprisingly, Waste Management's recycling division has performed poorly compared to its other divisions since 2010 with a revenue CAGR of -1.16% and an income per material recovery facility CAGR of -1.65%.
Source: Author Using Annual Reports 2012 | 2014 | 2016 | 2018 | 2019
5. Other
Like recycling, other revenue is comprised mainly of three separate revenue streams:
- Strategic Accounts Organization
This department is managed through the Strategic Business Solutions Organization and works with its customers to centralize their waste service, billing, and account management in order to streamline the process and reduce inefficiencies.
- Energy and Environmental Services Organization
This department handles specialized waste guidance for a variety of different services and organizations. In Waste Management's Q4 2019 10-K, the company states:
Including (I) construction and remediation services; (II) services associated with the disposal of fly ash, residue generated from the combustion of coal and other fuel stocks; (III) in-plant services, where our employees work full-time inside our customers’ facilities to provide full-service waste management solutions and consulting services; this service is managed through our EES organization but reflected principally in our collection line of business and (IV) specialized disposal services for oil and gas exploration and production operations; revenues for this service are also reflected principally in our collection line of business.
- WM Renewable Energy Organization
Waste Management currently operates 124 landfill gas beneficial use projects out of 249 landfills. These projects harvest the methane and other gases produced by the waste decomposing in the landfills and process it for three different uses.
1. Electricity Generation: 97 Projects
The gases are processed and sold to utilities and power cooperatives powering approximately 500,000 homes.
2. Pipeline-Quality Natural Gas: 15 Projects
The gases are processed into pipeline-quality natural gas, which is then transported and sold to natural gas suppliers.
3. Industrial Fossil Fuel Alternative: 12 Projects
These gases are either used at the landfill or delivered by pipeline to industrial customers to be used as an environmentally friendly and economically competitive alternative to fossil fuels. It is unclear if these are used for electricity generation, production of different materials, other fuel, etc. However, one example is the production of the CNG that fuels 60% of Waste Management's collection trucks.
Other revenue, over the last ten years, has quickly become one of the most important revenue segments to watch. With a CAGR over the last ten years of 18.80%, other revenue is currently the third-largest revenue segment for the company. All things being equal, I fully except other revenue to surpass Waste Management's transfer revenue in 2021 for the second-largest revenue slot.
Source: Author Using Annual Reports 2012 | 2014 | 2016 | 2018 | 2019
Waste Management Financial Results
- Income Statement
In the above section, I went over the majority of Waste Management's revenue results from 2010 through 2019, and therefore, in this section, I will focus on EBITDA rather than revenue. For fundamental valuations, I will often focus on EBITDA, as I, and many other analysts, believe it provides a better picture of a company's operating results. Additionally, I believe it offers a more consistent, and relevant, comparison across a sector or against a company's competitors.
Data by YCharts
Between 2010 and 2019, Waste Management's EBITDA growth has been a respectable 33.44% coupled with revenue growth of 31.07% on an annual results basis. However, EBITDA margin has only grown 1.81% over the last ten years.
Data by YCharts
However, when comparing Waste Management's annual EBITDA margin growth to that of its largest peers, Republic Services (RSG) and Waste Connections (WCN), the company's EBITDA margin growth has clearly outperformed the competition. Advanced Disposal Services (ADSW) is also a peer to Waste Management, being the fourth-largest competitor. However, due to the pending, and likely to get approved, acquisition of Advanced Disposal Services by Waste Management, I decided to exclude it from the peer analysis.
Data by YCharts
Over the last ten years, Waste Management's annual capital expenditures as a percentage of annual operating cash flow have hovered between 42% and 54%. While this range is in the middle of its two main competitors, Waste Management is making more strategic use of its capital expenditures. With a heavy focus on technology and finding new ways to make use of its assets, the company's outperformance against its peers in relation to expanding its EBITDA margin should come as no surprise. Two perfect examples of this are Waste Management collecting and processing the gases produced by its landfills to run 60% of their collection vehicles and the increasing use of transfer stations. Due to the continued expansion of Waste Management's program to replace its gasoline collection vehicles with CNG vehicles and continued commitment to investment in innovation, I do expect the company's revenue, EBITDA, and EBITDA margin growth to continue to expand.
In this Bloomberg interview, Waste Management's CEO, James C Fish Jr., discusses how, in response to the 25-year low in recycling commodity prices, they are creating a new type of material recovery facility. The new facility has a heavy focus on robotics, reducing overhead, and, more importantly, creating a significantly less contaminated recycled stream. With reduced prices for recycled commodities predicted to be the new normal, being able to produce a higher-grade recycling steam than its peers will allow Waste Management to stem the year-over-year losses its recycling division has seen since prices fell after the Chinese ban in 2017 (see above section 4. Recycling for more information). Waste Management has also partnered with Starbucks (SBUX) to find a way of recycling its disposable cups, which has been impossible in the past due to the plastic coating on the inside of each disposable cup. Even with these innovations, however, recycling remains the only area of concern I have regarding Waste Management's future revenue, although it remains the company's fifth-largest revenue segment after being surpassed by other revenue in 2016.
- Statement of Cash Flows
| Statement of Cash Flows (CY2019 Results) | $ |
| Net Cash Provided by Operating Activities | 3,874,000,000 |
| Net Cash Used in Investing Activities | (2,376,000,000) |
| Net Cash Provided by (Used In) Financing Activities | 1,964,000,000 |
| Effect of Exchange Rate on Cash | 2,000,000 |
| Net Cash Provided Total | 3,464,000,000 |
| Net Cash Flow Excluding New Borrowings (Loss) | (1,221,000,000) |
Data by YCharts
Waste Management is a cash-generating machine, with net operating cash flow increasing by 64.01% over the last ten years, the company's ability to consistently produce cash places it in a strong position financially.
Data by YCharts
With an operating cash flow to assets return of 15.38% annually, Waste Management has been able to generate over 3.5% more cash from its assets on an annual basis than its peers for the last three years. While not outperforming when it comes to debt measurements, I remain confident in the company's ability to manage its current debt load, even at a 3-1 debt to operating cash flow ratio. Discussed more in the next section, Waste Management has been taking advantage of the low-interest rate environment and its high cash flow to buy back high-interest rate debt while taking on lower-rate and longer maturity date debt.
Debt and Assets
In the above sections, I have gone over, in depth, the different assets owned, controlled, and operated by Waste Management. Therefore, in this section, I will focus on the company's debt and liabilities. The below map, taken from Waste Management's 2019 Investor Day presentation, shows the spread of its landfills, transfer stations, material recovery facilities, and hauling stations.
- Assets: $27.743 billion
- Liabilities (ex-debt): $7.175 billion
- Debt (Current and Non-Current): $13.498 billion
In the below two tables are the interest rate terms set out for the 2018 and 2019 Waste Management long-term revolving credit facility managed by Bank of America. Besides the significant drop in the facility fee and interest rate, the renewed and amended agreement increased the maximum borrow amount from $2.7 billion to $3.5 billion. The 2019 revolving credit facility was announced on November 7, 2019.
As you can see, there are terms set out for borrowings in Canadian dollars. This is capped at US$375 million out of the $3.5 billion at any one time, and borrowings will be repaid in Canadian dollars. Outside of the revolving credit facility, Waste Management has been on a debt repayment and issuance spree over the last five years. As the chart below shows, with the exception of 2018, the company has issued over $2 billion in debt annually since 2015.
Data by YCharts
Discussed in more detail under the Advanced Disposal Acquisition section below, it is important to note here that a large portion of the debt issued in 2019 is due to the all-cash nature of the acquisition. To use 2019 as an example, the below chart shows the maturity dates and yield of the new debt and the debt retired before its due date.
| New Debt Issuance 2019 |
| Maturity Date | Amount Issued $ | Yield | Type of Debt |
| 2024 | 750,000,000 | 2.950% | Unsecured Senior Debt |
| 2026 | 750,000,000 | 3.200% | Unsecured Senior Debt |
| 2029 | 1,000,000,000 | 3.450% | Unsecured Senior Debt |
| 2039 | 500,000,000 | 4.000% | Unsecured Senior Debt |
| 2049 | 1,000,000,000 | 4.150% | Unsecured Senior Debt |
| Debt Retired 2019: Total Retired $1,322,000,000 (Cost $344,000,000) |
| Maturity Date | Yield |
| 2026 | 7.100% |
| 2028 | 7.000% |
| 2029 | 7.375% |
| 2032 | 7.750% |
| 2039 | 6.125% |
Clearly, early retirement and replacement of Waste Management's debt is in the best interest of both the company and shareholders. Capital is being deployed effectively, and the company has managed to keep its debt well within manageable ranges. Over the last ten years, Waste Management has kept its quick ratio between 0.75-1.00 and operating cash flow-to-debt between 0.24-0.33. In other words, over the last ten years, the company has averaged between 3-4 years' worth of net operating cash flow required to repay its total debt.
Data by YCharts
Since approximately 71% of Waste Management's debt comes due after 2024, in a worst-case scenario, where the company cannot issue more debt or draw from its revolving credit facility, it will have no trouble repaying its total debt from net cash from operations. Even in this worst-case, and completely improbable, scenario, the company would not be forced to cut its dividend or sell assets to repay its total debt without defaulting.
Source: Waste Management 2019 10-K
If further proof is required that Waste Management is properly handling its debt, while its total debt has been increasing, the company's total interest payments have decreased over the last ten years. In 2010, Waste Management's total long-term debt was $8.873 billion, and this has increased by approximately 52.15% to $13.500 billion in 2019. Meanwhile, in 2010, net interest payments were $413 million annually, and these have decreased by -0.44% to $411 million annually in 2019.
Waste Management's ESG Credentials
In 2018, Waste Management was named the sector leader for the Dow Jones Sustainability Index for Commercial Services and Supplies. The company also follows the reporting standards on sustainability set out by the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the UN Sustainable Development Goals. Additionally, Waste Management's landfill gas is considered to be sustainable by the EPA. Waste Management's sustainability goal to "offset four times the greenhouse gas emissions we generate through our operations by 2038" seems well within reach. Some interesting statistics on the company's sustainability achievements are listed in the below chart from its 2019 Investor Day.
At this point, some of you may be thinking, "I don't base my investments on ESG, why should I care?" While I am not pretending that I only make investments if they fit the ESG criteria, from a liquidity and index inclusion standpoint I believe it is definitely a bonus to an investment, and will increasingly be so in the future. BlackRock, in January 2020, announced that it would start using its considerable voting power to force companies to focus their attention on climate change goals. A large study by the U.S. private bank Brown Brothers Harriman found that in five years, almost one in five investors will have 21%-50% of their portfolio allocated to ESG funds. However, this article is not an analysis of ESG investing, and if readers would like to know more about this trend, which I highly recommend looking into, this article published February 14, 2020 by CNBC, titled "The numbers suggest the green investing ‘mega trend’ is here to stay", is a great primer.
Advanced Disposal Acquisition
On April 14, 2019, Waste Management announced the acquisition of publicly listed peer Advanced Disposal for $33.15 per share in an all-cash deal. This valued Advanced Disposal at $4.9 billion, included net debt of approximately $1.9 billion. The company's assets include 95 collection operations, 73 transfer stations, 41 owned or operated landfills, and 22 owned or operated recycling facilities. While clearance for the acquisition is still being decided on by the US Department of Justice, Waste Management has held a consistent public stance that it will receive antitrust clearance from the DoJ in the next couple at the latest. This would be an excellent acquisition for Waste Management, as it would allow the company to expand its operations at a time when it is primed for such an expansion. It also never hurts to take your third-largest competitor off the table. As I will discuss more in the risks section, if this deal does receive pushback from the DoJ, I would except a significant negative reaction from the market.
Risks
One of the largest risks facing Waste Management's long-term profitability is the continued poor performance of the price of recycled commodities. The market could significantly underperform due to any number of reasons: a downturn in the economy or a larger, global, crackdown on the quality of the recycling stream. While in 2019 recycling was only 5% of the company's revenue, a significant collapse in the price of recycled goods is not priced into the stock. While I am not saying this will happen, it is a risk investors need to keep an eye on.
One major event that is definitely priced into the stock is the successful completion of the Advanced Disposal acquisition. If the US Department of Justice does not give the all-clear from an antitrust perspective, as they are widely assumed to do, I do believe this will have a significant impact on the price of the stock. While there is no indication this will happen, you can never know what the DoJ will do until it is done, and investors must keep an eye out for any indication as to which way they will come down on the acquisition.
Analysis of Different Plays for Waste Management
Waste Management has committed, in its Q4 2019 conference call, to purchase at least $1 billion of stock in 2020, starting in Q1 2020. This is a substantial amount of share purchases and will create a level of demand, no matter what the equity market does in 2020, that cannot be discounted. To be clear, I am not saying the stock price, therefore, cannot decrease in 2020 or in the worst-case collapse. But this will help reduce any negative share price movement and increase the upward momentum of any rally. Below, I have selected two common investment strategies and analyzed whether Waste Management is a buy at its current price of $112.71 (end-of-day price 03/03/2020).
- Dividend Investing
Dividend investing has always been a popular method, and for good reason. Losing money to inflation can really take a bite out of your net worth in the long run, and since 2010, Waste Management and the S&P 500's dividend yield have almost always yielded above the average US inflation rate.
Data by YCharts
Since the end of the global financial crisis (GFC) in approximately 2010, the world has been stuck with extremely low, and in some places negative, interest rates. This has caused dividend investing to increase in popularity, as investing in safe bonds, certificates of deposit, and other safer forms of safer, passive investing yielded far below the average rate of US inflation. To put things in perspective, I gathered the daily, trailing 12-month yield of Waste Management since 2017 and compared it to the daily yield of the US 10-Year Treasury. I chose the 10-Year Treasury bond, as it is largely considered to be the safest possible investment. You can see the comparison in the chart below. Investing in any publicly traded company will always have more risk than investing in US treasuries, and if purchasing a company solely for its dividends, this is a comparison well worth considering. Especially since US treasuries are widely considered to be one of the most liquid investments. Since I had already gathered the data, I ran a correlation check which returned a correlation coefficient of 0.44; therefore, there is no identifiable correlation.
Source: Author Using Yahoo Finance and macrotrends.net
10-Year_Treasury_Versus_WM_Dividend_Yield_Since_2017.xlsx
Waste Management's dividends are consistent, easily paid by operating cash flow, and likely to increase in the coming years. However, my personal view is an investment made with the purpose of dividend payments should have a yield that is at least slightly higher than the average US rate of inflation. Therefore, at its current price, I believe Waste Management is a hold from a dividend investing perspective.
- Fundamental Investing
Featuring strong cash flows, a group of well-performing assets, an experienced and more than competent management team, and a highly manageable debt load, Waste Management is a clear-cut example of a long-term slow growth fundamental investment. However, with all investments, the price has to be right, and $112.71 a share, I believe, is too high a premium to pay for Waste Management, even though I am a big fan of the business. I would be a buyer at $100 and below based on the current financials. This does not mean the stock is a short - far from it - but from a fundamental perspective, the price is just too high. Investors must be disciplined and wait to pull the trigger - the best company at too high a price makes for a poor investment. However, Waste Management is towards the upper range of where I feel is reasonable, due in large part to the recent selloff, and therefore, I would not recommend selling at this price either. Therefore, from a fundamental investing point of view, I would rate Waste Management as an avoid, but definitely one to put on your watchlist.
Source: Author Created (Using CYQ4 2019 10-K and NYU_Enterprise_Value_Multiples_by_Sector__US__Jan_2020.xlsx)
- Macro
Waste Management is clearly a population growth play, as the more people, the more waste they produce. The increasing trend towards urbanization that the United States and the world are experiencing will also be a boon for waste companies for similar reasons. In my opinion, Waste Management's forward-looking management team, strong operating cash flow, and willingness to embrace technology and innovation will allow it to take advantage of this trend in a way no other North American company in the environmental and waste services industry will be able to. For more information on the global trend towards urbanization, I recommend the publications of the World Economic Forum. To start with, I recommend the article published in September 2019, titled "The dramatic global rise of urbanization (1950–2020)".
Source: The World Economic Forum
- Overall Rating
My overall rating for Waste Management is a hold. When the price comes down to around $100 a share, I would then change my rating to a buy. Waste Management is, in my opinion, the best publicly traded company in the North American environmental and waste services industry, and therefore, demands a premium to its peers. However, the premium you would be paying at $112.71 a share is too high. Waste Management is a must for any investors watchlist, and I will be keeping a close eye on this company during any market pullback. I recommend you do the same.
Source: Author Created (Using CYQ4 2019 10-K and NYU_Enterprise_Value_Multiples_by_Sector__US__Jan_2020.xlsx)
For a breakdown of what my recommendations mean, please see my blog post here: "Russell Katz's Rating System: A Breakdown".
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
While I express my opinion in this article, only you can determine if a specific strategy is right for your portfolio. You should always do your own research before buying, selling, or shorting any stock. Any charts, graphs, or tables not specifically credited to another individual, company, or institution were created by the author using his own research.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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