From Waste to Wealth: Do these 3 Stocks Offer Strong Value?
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Value investors often profit by investing in necessary but unattractive industries. A case in point is waste disposal, which is a growth industry. Everyone needs waste disposal, even though we may not think about it. One garbage hauler that looks like an attractive opportunity right now is industry leader Waste Management (NYSE: WM).
As you can see, Waste Management’s share value has dropped steadily in recent weeks. It is cheaper, but is it now a value buy?
As a stock, Waste Management has a lot going for it. It has a dividend rate of $1.42 a share and a yield of $4.48. The company also registered sales growth of 6.9% and an income growth of .8% in the last year, as well as a net profit margin of 7.05%. The only really dark spot in Waste Management’s numbers is its debt-to-equity ratio of 1.59, which exceeded its income growth. The debt-to-equity ratio approaches the earnings per share ratio of $1.97 a share, so Waste Management has a lot of debt—but is it typical of the industry?
Waste Management also posted annual sales of $13.68 billion. That means Waste Management brought in $944 million in additional sales in the last year. The only problem is that Waste Management’s income is not growing despite the sales increase. Its income of $917 million only increased by around $73 million, or 8%, in the past year. That indicates the company has figured out how to increase its sales, but not its income.
Casella Waste Systems: A Mountain of Debt
But at least Waste Management showed any income growth. Its smaller competitor, Casella Waste Systems (NASDAQ: CWST) saw a massive drop in income. Income at Casella fell by $82.98 million in the past year, making for a negative income growth rate of 2,014.2% and a negative profit margin of 17.48%. If that wasn’t bad enough, Casella had a debt-to-equity ratio of 69.69, which means that the company has taken on a lot of debt.
Casella’s shares seem to be pretty accurately priced if you evaluate it by the fundamentals. Even though its price is low, Casella is no bargain because of all that debt. Casella’s performance raises serious questions about the entire waste disposal sector, which is characterized by intense competition and rising expenses in the form of fuel costs.
A Successful Garbage Company
Thankfully for investors there is another trash company with better figures and impressive income growth. Republic Services (NYSE: RSG) registered income growth of 16.3% and a net profit margin of 8.27%. Republic had sales of $8.18 billion and an income of $676.60 million, which generated an earnings per share ratio of $1.82 and a forward P/E of $13.41.
Whether Republic can maintain its position is hard to determine because of aggressive new competitors such as JunkiT! and 1-800-GOT-JUNK? These companies offer a higher level of customer service and a more flexible business model. Unlike 1-800-GOT-JUNK, JunkiT! competes directly with companies like Casella, Republic, and Waste Management by offering dumpsters, residential and commercial trash pickup, and cleanup services.
The bottom line is that whenever a sector is hit by heavy competition, value investors need to be wary. When companies start competing aggressively, they start throwing cash away like garbage. As we’ve seen above, both Waste Management and Casella have had a hard time keeping cash. Republic seems to have avoided that trap, but for how long?
Even though it can generate a lot of cash, value investors need to be careful about the waste sector. Waste companies are having a difficult time holding onto all that cash, and it doesn’t look like that situation is going to change anytime soon. In the near future, competition in the sector is going to make it harder for trash companies to hang onto their money. Investors looking for exposure to the waste sector should consider buying Waste Management and Republic Services, but should avoid Casella Waste Systems at this time.
BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Waste Management. Motley Fool newsletter services recommend Republic Services and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.