Why Is This a Stable Alternative Energy Play?

Mike 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) is a provider of disposal, collection and recycling services in North America. Most investors are likely familiar with the company’s green bins and trash-collection services. However, investors may be less aware of the significant recycling and energy recovery businesses the company is involved with. The company has reported that it can produce over 550 megawatts of electricity, enough to power more than 440,000 homes, from its landfill natural-gas recovery program. This offsets the burning of over 2.2 million tons of coal per year.

Waste Management produces more renewable energy in the United States than the entire solar industry, in combination with its waste-to-energy program. Thus, Waste Management may arguably be one of the most green companies in the market, and provides more stable and predictable performance than the volatile solar sector.

Waste Management is committed to expanding its recycling capabilities. The company acquired Greenstar, one of the country’s largest private recyclers, in January. Greenstar managed approximately 1.5 million tons of recycled material, providing Waste Management with an overall capacity to manage 15 million tons of recycled material annually. Recycling is an important aspect of the company’s business.

Waste Management has a market cap of $18.5 billion, and a P/E ratio of 22.7. First quarter 2013 revenue was slightly more than $3.3 billion versus $3.3 billion for the prior year quarter, representing an increase of 1.2%. Net income was $0.36 per diluted share, versus $0.37 per diluted share for the prior year quarter. Earnings were hurt by a drop in recycling commodity prices of around 12%, along with an increase in operating expenses of $43 million. Waste Management's guidance is that 2013 adjusted earnings will increase between 4% and 6%. The company’s net income for the fiscal year 2012 was $13.6 billion.

Recent valuation

Overall, the stock has performed well and is up 19.8% year-to-date. The stock has a fairly low beta of 0.7, indicating that it trades with less volatility than the overall market. The company has an attractive dividend yield of 3.7%, and a dividend has been paid every quarter since at least 2009. Waste Management has a short float of 3.9% with 17.8 million shares being shorted as of the end of May.

Others in alternative energy

Waste Management’s main competitor is Republic Services (NYSE: RSG). Republic takes away non-dangerous waste from houses and businesses, much like Waste Management. Its operating margins are quite similar, in the mid-teens, but Waste Management is superior at reinvesting capital with a significantly higher ROE at 13%.  

Republic has a market cap of $12.3 billion, along with net income of $5.5 billion for 2012. The company has a P/E ratio of 22.5, comparable to Waste Management, and a lower dividend yield of 2.7%. Republic’s share price has performed well in the last year, rising 37.2%. The stock is currently trading at around $34.06. It has a slightly higher beta of 0.8 and low monthly volatility of 1.6%.

Another competitor, Stericycle (NASDAQ: SRCL), is a medical waste and compliance provider, including biohazard and pharmaceutical waste management. Stericycle has a market cap of $9.2 billion, and a higher P/E ratio of 33.4, which is higher than those of Waste Management and Republic. This higher P/E is likely due to the growing niche market that Stericycle is in.

The company had net income of $2.8 billion for 2012. It currently does not pay any dividends. Stericycle’s stock hit a 52-week high of $113.11 in mid-May, but is now trading around $106.  Overall, the company seems to have greater prospects in the waste-disposal industry but you have to pay a larger price on an earnings-yield basis.

Foolish bottom line

Waste Management, as a significant provider of renewable energy, is an environmentally friendly investment opportunity. Furthermore, the company has an attractive dividend yield, although there is no guarantee that dividends will continue in the future. Revenue appears stable but may not be growing as much as some investors would like.

The company has many advantages over the solar sector. Compared to a monthly volatility of 4.5% for the Guggenheim Solar ETF (TAN), Waste Management is much more stable and is not subject to the uncertainty of Chinese competition. Thus, environmentally conscious investors, as well as dividend investors, should seriously consider taking a good look at Waste Management.

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Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Republic Services, Stericycle, 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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