Millions of North American’s Trash is Turning Into Investors’ Treasure

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2013 begins, I would like to focus on a leading waste management service company in North America: Waste Management (NYSE: WM).

The Business:

Warren Buffett once said, “Never invest in a business you can’t understand.” This not only allows the investor to purchase a company with conviction, however also allows them to spot trends blind to unfamiliar eyes. With this in mind, investors in any company should fully understand the business model of the company. Waste Management is a leading provider of waste management services in North America. The company provides collection, recycling, and disposal services. Based on market capitalization, Waste Management is valued at $17.03 billion, and possesses a profit margin of 6.52%.

Strengths:

  • Dividend: Currently, Waste Management pays out quarterly dividends of $0.35, which when annualized puts the dividend yield at 3.87%
  • Institutional Vote of Confidence: 77.20% of shares outstanding are held by institutional investors, displaying the confidence some of largest investors in the world have in the company and its future
  • Relatively Low Volatility: Presently, the company possesses a beta ratio of 0.56, which represents a company trading with considerably less volatility than the overall market
  • Provides Necessary Services: Waste collection and management is a necessity in all cycles of economic activity, and because of this there will always be a demand for Waste Management’s services, providing greater security and predictability for investors
  • Reliable & Steady Revenue Growth: In 2007, Waste Management reported revenue of $13.31 billion; in 2012, the company announced revenue of $13.65 billion, representing year over year growth of 0.51%, a reliable and steady trend that is anticipated to continue into the future, with projections placing 2016 revenue at $15.63 billion
  • Reasonable Valuation: At the moment, the company trades with a price to earnings ratio of 20.85, a price to book ratio of 2.68, and a price to sales ratio of 1.25, all of which indicate a company trading with a reasonable valuation
  • Positive Free Cash Flow Position: In 2011, Waste Management generated $1.2 billion in free cash flow, a major advantage for investors as the company has the ability to reward shareholders or reinvest into its own business
Weaknesses:
  • Net Debt: Despite the company’s $194 million in cash and cash equivalents on their balance sheets, Waste Management’s $9.17 billion in debt results in a rather substantial net debt, a major weakness

Opportunities:

  • Dividend Growth: Since implementing their dividend program in 1986, Waste Management has consistently raised their dividend payouts and is expected to continue this trend well into the future
  • Continuation of Fundamental Trash Trend: Every year North Americans produce more trash, as there are more people each year in the United States, and a continuation of this fundamental trash trend will present opportunity to the company to meet the rising demand for waste collection and management
  • Conversion of Fleet to Natural Gas: One of the largest expenses of the company is gas and diesel to fuel their fleet of waste collection vehicles, but the company has pledged to convert 80% of its truck fleet to running on natural gas, which is nearly half the price of traditional gas on a per gallon basis, and this conversion presents an incredible opportunity for the company over the long haul to save money and improve margins
  • Acquiring New Customers: While Waste Management is the most prominent waste collection company in North America there are still select regions which are serviced by other companies, and the acquisition of any new customers could fuel growth
  • Waste-Based Renewable Energy: The company is the largest landfill gas to energy developer and operator in North America, and in 2011 commissioned six new facilities and three major expansions, and as of the end of that year possessed 131 active projects producing the equivalent of 615 MW of power.  Further expansion in this innovative industry could spark growth  

Threats:

  • Rising Fuel Prices: A major increase in traditional gas or natural gas prices could squeeze the company’s margins and pose a major threat to the company

Competitors:

Major publicly traded competitors of Waste Management include Waste Connections (NYSE: WCN), Republic Services (NYSE: RSG), Clean Harbors (NYSE: CLH), and Stericycle (NASDAQ: SRCL). All of these companies operate in the waste management and collection industry and compete directly with Waste Management. Waste Connections is valued at $4.41 billion, pays out a dividend yielding 1.11%, and carries a price earnings ratio of 26.62. Republican is valued at $11.31 billion, pays out a dividend yielding 3.00%, and carries a price earnings ratio of 20.16. Clean Harbors is valued at $2.72 billion, does not pay out a dividend, and carries a price earnings ratio of 25.64. Stericycle is valued at $8.35 billion, does not pay out a dividend, and carries a price earnings ratio of 31.53.

The Foolish Bottom Line:   

Financially, Waste Management is solid. The company possesses steady and reliable revenue growth, a growing dividend, and provides services that are considered necessities. The company’s debt load is outweighed by the predictability and security of their business. Looking forward, the company’s future is filled with stable growth and possible margin expansion due to the conversion of their fleet to natural gas. All in all, Waste Management is a recession proof business that should enjoy steady and solid returns for investors for decades to come.


makinmoney2424 has no position in any stocks mentioned. The Motley Fool recommends Republic Services, Stericycle, and Waste Management. The Motley Fool owns shares of Clean Harbors 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure