Tuesday, July 27, 2010

Stock Analysis: Waste Management (WM)

Waste Management (WM) is the largest waste management company in the United States controlling nearly 30% of the waste management market. The company has 43,000 employees and serves approximately 20 million commercial, residential, and industrial customers. Waste Management has “367 collection operations, 355 transfer stations, 273 active landfill disposal sites, 16 waste-to-energy plants, 134 recycling plants, and 111 beneficial-use landfill gas projects."

Waste Management generated $11.7 billion dollars in sales last year. The company is expecting to earn $12.4 billion in revenue this year and nearly $13 billion in 2011. The company has been able to achieve top line growth through acquisitions and business expansion. Revenue is slated to increase 5.3% for the current year and 4.3% next year. The company has above average operating and profit margins for the waste management industry with 16.5% and 8.5% respectively.

The waste management industry is a defensive industry that can thrive during booms and recessions. Strong cash flows and pricing power are constants throughout the industry. Waste Management Inc. does not face many threats from new market entrants because of the high barriers. The industry is extremely capital intensive and subject to increased governmental regulations. Waste Management’s largest competitor is Republic Services. The two companies together account for more than half of the trash collection in the United States.

Over the past few months, Waste Management has been working to grow its brand. Company management has made a strategic investment in Enerkum’s biofuel plant and acquired assets from Milum Textile Service. Management has also done a good job of providing value to shareholders. The company has a return on equity of 16.8% and a return on assets just south of 6%.

The only drawback for Waste Management is its huge debt load of $8.8 billion dollars. The debt load forced the company to restructure its debt during the economic crisis of 2009. Waste Management should have no problem servicing its debt in the future with its large amounts of free cash flow. Waste Management is a cash machine generating $2.3 billion in free cash flow last year.

For 2011, Waste Management is projected to earn $2.38 per share. Earnings are projected to grow 9.25% over the next 5 years. The stock trades at just 14 times earnings which is below the industry average of 16.7. The company is a great dividend play with shares currently yielding 3.8%. The historical dividend yield has been 2.9%. The dividend is sustainable since the company currently pays out just 57% of earnings via dividends.

Shares of Waste Management are not cheap based on a price/book ratio or its price/earnings growth. The stock is a value however based on its discounted P/E, dividend yield, and premium franchise. Long term investors should feel comfortable buying shares in the low $30’s.

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