Is Waste Management a Good Stock to Buy?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Waste Management (NYSE: WM), an $18 billion market cap waste management services company, has risen 16% year to date, narrowly outperforming the S&P 500 despite the fact that the stock carries a beta of 0.7 and hence would be expected to underperform during a bull market. The company’s revenues increased only 2% last year compared to 2011, and with operating costs increasing at a faster rate Waste Management experienced a 15% decrease in net income. Cash flow from operations was also down slightly. The fourth quarter of the year was in line with the general trend for 2012, as sales showed very little increase from their levels a year ago, while net income declined at a double-digit rate.

However, investors have been bidding up the stock (as we discussed earlier), and currently Waste Management trades at 22 times trailing earnings. The sell-side does expect some bottom-line growth over the next couple years, but still the forward P/E is 17, which seems rather high for a stable, almost utility-like business. So from a value perspective the stock seems, if anything, overvalued. Waste Management does pay a generous dividend yield of 3.8% at current prices, making it a strong contender for an income portfolio; with the fairly low beta as well it could also make for a good defensive stock.

We track 13F filings from hedge funds and other notable investors as part of our work researching investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can also use our database to see who liked Waste Management as of the end of December. The largest shareholder out of the filers we track was the Bill and Melinda Gates Foundation Trust, which owned nearly 19 million shares; the trust owns a significant percentage stake of fellow waste management services company Republic Services (NYSE: RSG). Value investor Barry Rosenstein’s JANA Partners initiated a position of 1.3 million shares in the fourth quarter of 2012 (find JANA's favorite stocks).

Waste Management’s peers, other than Republic Services, include Waste Connections (NYSE: WCN), Progressive Waste Solutions (NYSE: BIN), and Covanta (NYSE: CVA). The two highest dividend yields belong to Republic Services and Covanta, though each pays a lower yield than Waste Management does. Republic pays 2.9% to its shareholders, and its stock price also has a weak statistical relationship to the market with a beta of 0.6. However, it doesn’t seem that competitive compared to Waste Management, and its own business has been struggling recently. Covanta, which operates energy-from-waste facilities, is actually valued at over 30 times analyst consensus for 2014; with its dividend yield also above 3%, but lower than what an investor would get at Waste Management, we would avoid it.

Waste Connections and Progressive Waste Solutions are also priced for growth. In each case revenue was doing quite nicely in the company’s most recent quarter compared to the same period in the previous year; Waste Connections reported an 18% increase in sales, though its earnings actually fell modestly. While that stock has a quite low beta at 0.3, we have little confidence in its valuation and the dividend yield is nothing special. Progressive at least pays investors 2.6%, but this is lower than what we’ve seen at some of its peers. Of course as with these other companies the earnings multiples are high (trailing and forward P/Es of 26 and 18, respectively) and while Progressive has seen some growth on the top line we don’t think it is enough to justify the current valuation.

All five of these stocks post trailing P/E multiples of more than 20, suggesting that the market is expecting high earnings growth from the industry. Recently, however, financial performance has not been that strong, so we’d actually wonder if some of these stocks are good shorts. Some companies do pay good dividend yields, with Waste Management the highest among them, and if an income investor is interested in the industry that is probably the first stock to consider.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Republic Services and Waste Management. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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