Waste Management: Turning Trash Into Cash

By Frank Constantino - April 30, 2012 | Tickers: RSG, WCN, WM | 0 Comments

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Trash is a certainty in life and there are limited options for getting rid of it.  The non-hazardous solid waste industry generates $50 billion in annual revenues doing just that.  It's an industry that grows slowly and produces mountains of cash for its operators.  It's also an old industry going through big changes.

Waste Management (NYSE: WM) is the leading provider of comprehensive waste management services in North America.  The company provides waste collection and disposal services as well as comprehensive recycling solutions and hazardous waste disposal.  In addition, Waste Management is a leader in the field of waste-to-energy and landfill gas-to-energy development.  Waste Management owns and operates 271 landfill sites, the most in the industry.  The company also owns 287 transfer stations which sort, consolidate, compact and transport waste.

Trash collection and disposal is by far the company's largest source of revenue.  It's the cash-cow of the business, so to speak.  It generates nearly $8.5 billion of annual revenue for Waste Management.  Waste Management provides collection services for commercial, industrial, and residential customers.  It also contracts with municipalities and other local governments to service their residents.  Another large source of revenue comes from owning and operating its own vast network of landfills.  Not only does owning the landfills save Waste Management money, it generates a lot of revenue from other providers utilizing its landfills.  Five of Waste Management's 271 landfills are specialized for the disposal of hazardous material.  The table below breaks down Waste Management's revenue by segment of operations.

While collection and landfill operations generate the most revenue and a lot of cash flow, the company's future growth is likely to come from other areas.  Recycling operations provide industries and communities with an alternative to traditional garbage collection and landfill disposal.  Recycling also helps Waste Management extract more value from materials.  Waste Management operates 107 recycling processing centers where paper, cardboard, metals, plastics, glass and other commodities are recovered for resale.  Other recyclable materials are processed and turned into raw materials for resale.  By charging for recycling collection and reselling the materials collected Waste Management can produce higher returns on the materials it manages.  In addition, Waste Management boosts its returns by buying more recyclable products then processing them for resale. The market price for certain commodities that are derived from recyclables often determines the amount of revenue recycling generates for the company.  Since 2009, revenue from recycling has grown 113%.  This is in part due to the strategic acquisition of Oakleaf Global Holdings in 2011.  As recycling demand increases and the amount of materials able to be recycled grows, Waste Management will benefit as one of the leading provider of these services in North America.

Waste Management, through its Wheelabrator subsidiary, owns and operates 17 waste-to-energy facilities and five independent power production plants (IPPs).  To generate energy, solid waste is burned at high temperatures and converted into steam.  The waste-to-energy facilities are capable of processing 22,300 tons of solid waste per day - good for the environment and good for Waste Management.  IPPs burn different types of materials that are particularly hard to dispose of.  Energy produced from these facilities is sold into the wholesale markets.  Waste Management's waste-to-energy businesses account for a relatively small portion of overall revenue but it's a concept that's likely to grow in the future.  As more waste needs to be disposed in eco-friendly ways and the demand for energy increases, turning waste into electricity becomes an attractive business.

Waste Management's two primary competitors are Waste Connections (NYSE: WCN) and Republic Services (NYSE: RSG).  These two competitors together are smaller than Waste Management by market cap.  Both Republic and Waste Connections are involved in the more lucrative recycling business, however neither have operations in converting waste to energy.

Shares of Waste Management currently change hands at $34.25.  The company trades at under 17 times earnings and has a forward P/E of 13.64.  Waste Management trades at 7.2 times cash flow and only 1.18 times sales.  The company has a price-to-earnings growth ratio of 1.54.  The biggest attraction to Waste Management's shares is its 4% dividend yield.  Net cash provided by operating activities increased 8.5% in 2011, from $2.3 billion to $2.5 billion.  Waste Management returned $1.2 billion to shareholders in 2011 through dividends and share repurchases.  The company boasts a return-on-equity of 15.55%.

Shares of Waste Management sold off last Friday as the company's quarterly income disappointed Wall Street.  However, quarterly revenue exceeded expectations.  An increase in costs was primarily due to the Oakleaf acquisistion and converting garbage trucks to run on natural gas.  The sell-off in the stock may present a buying opportunity for long-term investors.  I have long been a Waste Management shareholder due to the company's shareholder friendly practices.  In the past, when Waste Management's dividend yield exceeded 4%, it usually represented a good entry point.  Investors should consider reinvesting Waste Management's generous dividend for maximum return.

While Waste Management isn't likely to make anyone rich overnight, its steady cash flow from cash-cow businesses combined with opportunities in growth businesses, make it an attractive long-term investment. As Waste Management focuses on eco-friendly ways of getting rid of garbage, it is turning trash into cash for investors.

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