Reasons Why This Recycler Looks Great

By Piyush Arora - September 25, 2012 | Tickers: NES, RSG, WM | 0 Comments

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Think of a business model where one buys waste material from households and industries, lets the collected waste degrade, then collects the natural gas coming out of it to generate electricity. The falling prices of natural gas and the exposure to the electricity spot pricing makes the business model challenging, but not unviable.  There is a stable demand throughout the country to dispose of the waste, and it is due to this reason, the risks to topline subside significantly. The company we’re talking about is Waste Management (NYSE: WM) and to start it off, the company yields a healthy 4.34% and alongside boasts a massive gross profit margin of 92.4%

Waste Management is the leading complete waste management service provider in the North America. The company has a market capitalization in excess of $15 billion owns and operates 273 landfill sites along with 16 waste-to-energy plants. The company also owns and operates 134 recycling plants and over 21000 collection and transfer vehicles. Waste Management and its competitor Republic Services (NYSE: RSG) both together manage more than half of the waste collection in the US.

Wheelabrator Technologies, which is a subsidiary of Waste Management, operates 22 facilities which involve power generation from waste materials. The subsidiary has the capacity to generate nearly 896 megawatts of electricity from the waste, every day, and the eco-friendly energy generation division is able to generate $877 million revenues on an annual basis. To top it all, the Texas based company generates more than $8.5 billion in revenues from waste management and $2.6 billion from landfills. Also Waste Management makes money in the collection and transfer of waste materials, and with different streams of revenues, the business model looks well diversified yet rooted to its core competencies.

The shares of Waste Management yield 4.34% and the company has been paying out dividends consistently since 2004 which can be noticed from the attached chart.

The company recently reported a 3.3% increase in quarterly topline, and the revenues now stand at $3.35 billion. Net income rose from $237 million in the last year’s quarter to $240 million, which excludes onetime special costs. The numbers were flat primarily because of falling prices of natural gas, and not due to any inefficiency in operations.

To cut down on its expenses, the company is going through a restructuring plan, where the number of its corporate offices would be reduced from 22 to 17. The S&P believes that the move could add 0.75% each year for the next 5 years, to the existing ROIC. The market loves added profitability which is expected to finally reflect on the stock’s price.

Waste Management Inc. shares the market with Republic Services and Heckmann (NYSE: NES). The company has the best returns on its investments along with the best price to sales ratio amongst its peers. To make the investment option more lucrative, the company yields a healthy 4.34%

Conclusion

The company operates in an industry that’s necessary for day to day operations of households and various industries. Also the company has a diversified its operations and multiple revenue streams ensure stable revenues. Waste Management yields a healthy dividend and alongside is a good fundamental play. It is due to these reasons that we have a foolish buy rating for the stock.

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