Dumpster Diving: Are These 5 Waste Stocks Worth Buying?
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 dig through out-of-favor stocks to find underpriced companies. Often the companies they find are unloved, unknown, or completely unpalatable for most investors. They are cigar buts or garbage in the world of financial assets.
Perplexingly, many waste management companies are not trading as though they are garbage. Many of these stocks are trading at very dear multiples. Investors must exercise care to make sure they are not overpaying for these stocks.
Shares of Stericycle are trading at roughly $92 per share. Investors can buy more revenues per dollar from the S&P500 since this index has a price-to-sales ratio of 1.29 while this stock has a much higher 4.37 ratio. Stericycle shares are trading at a lofty 31.11 price-to-earnings ratio, a price multiple more than four times the 14.1 PE ratio of the S&P 500. Even the 5.74 price-to-book multiple of this stock is higher than the 2.05 S&P 500 price-to-book ratio. This stock is trading like a cutting-edge growth healthcare stock rather than a stock which disposes of healthcare waste.
At roughly $30 per share, Waste Connections (NYSE: WCN) also fails to provide investors a discount for buying a waste management stock. These shares are not even cheap, after a 10.3% decline in price over the past year. Investors can buy more revenues per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.29 while this stock has a much higher 2.33 ratio. Waste Connections shares currently trade at a high 21.83 price-to-earnings ratio, a higher value than the 14.1 average of the S&P 500 index. Shares trade at a 2.01 price-to-book ratio which is near the 2.05 S&P 500 average. The firm's reasonable 0.55 debt-to-equity ratio demonstrates that the firm is not over leveraged.
Covanta Holding Corporation (NYSE: CVA) is a waste-to-energy mid cap stock trading at glamor valuations. At a price of roughly $17 Coventa shares are trading at a rich 28.48 price-to-earnings ratio, more than twice the 14.1 average of the S&P 500. The stock’s 1.39 price-to-sales ratio is in line with today's prevailing market multiples as is its 2.33 price-to-book ratio. However, neither these price multiples nor enthusiasm for generating energy trash burning make up for the high price-to-earnings multiple.
Covanta’s dividend payments offer little solace. Sure, this stock pays a hefty 3.45% dividend which is more than twice the 1.74% 10-year treasury yield. However, the firm's 0.73 dividend payout ratio is shaky since this leaves very little room for failure and scarce funds for reinvestment.
Fortunately, some waste management firms trade at reasonable valuations. Such price multiples are offered by Darling International (NYSE: DAR) stock trading at an $18 price level. The firm's 1.25 price-to-sales ratio is in line with today's prevailing market multiples. Darling International shares are trading at a fair 15.76 price-to-earnings ratio, in line with the S&P 500 average. Shares trade at a 2.14 price-to-book ratio which is near the 2.05 S&P 500 average. The firm is also opportunistically growing its food waste recycling empire by acquiring assets.
Share purchases by Bill Gates have recently attracted media attention to Republic Services (NYSE: RSG). Fortunately, the stock still trades at a reasonable valuation based on a $28 price level. The firm's 1.24 price-to-sales ratio is in line with today's prevailing market multiples. Republic Services shares are trading at a fair 15.31 price-to-earnings ratio, in line with the S&P 500 average. The price-to-book multiple of this stock is 1.33, cheaper than the 2.05 S&P 500 average. Republic Services shares are also attractive for income based on a dividend yield of 3.37% and a sustainable 0.48 payout ratio.
Shares of Waste Management (NYSE: WM) are not also fairly priced at $32 per share. This stock has been flat over the past year. This stock's 1.09 price-to sales ratio is significantly less than the1.29 average of the S&P 500. Waste Management shares are trading at a fair 16.27 price-to-earnings ratio, in line with the S&P 500 average. Shares trade at a 2.41 price-to-book ratio which is near the 2.05 S&P 500 average.
Investors might want to steer clear of this stock until it grows into its dividend policy. Its high 4.43% dividend yield requires a 0.70 dividend payout ratio. This leaves very little earnings as a cushion for failure and scarce funds for reinvestment.
Investors looking for value might want to keep an eye on Darling International and Republic Services. They are trading at reasonable valuations and with small price declines could trade at compelling valuations.
Unfortunately, growth investors should look elsewhere for opportunities in waste management. Smaller ventures like JunkIt can provide a new take on this old industry. Instead of focusing on repeat service, JunkIt focuses on one-time and special order disposal jobs in the greater Toronto area. It offers different levels of service, from dumpster pick up to in-home removal. Growth in this industry can come from other innovative combinations of cleaning services and waste disposal.
BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Covanta Holding, Darling International, and Waste Management. Motley Fool newsletter services recommend Darling International, 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.