Is This Waste Management Company a Good Investment?

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), the $20 billion market cap trash and recycling collection services company, got off to a slow start for the year going by its 10-Q for the first quarter of 2013. During the quarter, revenue and earnings both came in about flat versus a year earlier. It makes sense that the company’s business would be more or less stable over time.

However, markets have liked the stock enough that its current valuation represents a trailing earnings multiple of 24 -- a pricing at which a company would generally have to see sustainable double-digit earnings growth in order to justify the valuation. Wall Street analysts actually predict that business will pick up next year, and so, the forward P/E is 18, but only limited faith should be placed in sell-side projections, and of course, Waste Management would have to continue to do well even if it did hit that target.

The stock could be of some interest to income or defensive investors, with a beta of 0.7, and with Waste Management’s quarterly dividend payment of $0.36 per share, resulting in a yield of 3.5%. However, even in these cases, investors should prefer cheaper offerings, and it should be noted that the company has a fairly high payout ratio at current earnings levels, which could prevent Waste Management from increasing its dividend payments by much in the future.

Who owns it

As a part of our work researching investment strategies, Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds and other notable investors; 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 (learn more about our small cap strategy).

We can also consult our database to track interest in individual stocks over time, and can see that the Bill and Melinda Gates Foundation Trust owned almost 19 million shares of Waste Management at the end of March (see more stocks the trust owns). Billionaire Mario Gabelli’s GAMCO Investors reported a position of 1.1 million shares (find Gabelli's favorite stocks).

Comparing the company to its peers

Republic Services and Waste Connections (NYSE: WCN) are two of Waste Management’s peers. Waste Connections is actually valued at a premium to Waste Management, with a trailing earnings multiple of 32, though the company has recently been doing quite well: in its last quarter, revenue increased 20% compared to the first quarter of 2012, and with margins expanding as well, its net income grew 33%.

That level of growth shouldn’t be sustainable for very long, but it may be worth looking into how Waste Connections has been performing so well. Republic Services, another favorite stock of the Gates Foundation, is similar to Waste Management in that its recent financials don’t show much improvement compared to a year ago, yet, the trailing P/E is above 20. With that company actually experiencing a decline in earnings, it should be avoided at this time on the basis of its valuation.

Waste Management can also be compared to Progressive Waste Solutions and US Ecology (NASDAQ: ECOL). US Ecology is actually priced about in line with Waste Management, but has been performing much better recently: in its most recent quarter, revenue rose 30% compared to the same period in the previous year, and net income grew at a double-digit rate as well. That growth rate makes the trailing P/E of more than 20 seem more reasonable, and it might be interesting to look into why the company has been doing so well.

Progressive Waste Solutions, with trailing and forward P/Es of 26 and 20, respectively, also has a valuation which prices in a good deal of future growth. However, as with US Ecology, recent reports show strong growth on both top and bottom lines. We aren’t sure how sustainable growth can really be in what would normally be considered to be a fairly stable industry, but it seems worth a look.

Conclusion

Waste Management doesn’t look very interesting to us: the combination of yield and beta aren’t that outstanding from an income perspective, and in terms of value, the stock certainly doesn’t look undervalued given the stagnant performance of late. However, some other companies in the industry, notably US Ecology, trade at similar multiples, but have been doing well enough according to their recent reports that they may be interesting growth plays.

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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 Waste Management. The Motley Fool owns shares of US Ecology 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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