Waste Management, Inc. (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 that 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 we’d generally like to see a company with 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 we put only limited faith in sell-side projections and of course Waste Management, Inc. (NYSE:WM) 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, Inc. (NYSE:WM)’s quarterly dividend payment of 36.5 cents per share resulting in a yield of 3.5%. However, even in these cases we think that the investors should prefer cheaper offerings, and would note that the company has a fairly high payout ratio at current earnings levels which could prevent Waste Management, Inc. (NYSE:WM) from increasing its dividend payments by much in the future.
Republic Services, Inc. (NYSE:RSG) and Waste Connections, Inc. (NYSE:WCN) are two of Waste Management, Inc. (NYSE:WM)’s peers. Waste Connections, Inc. (NYSE:WCN) is actually valued at a premium to Waste Management, with a trailing earnings multiple of 32, though the company has at least recently been doing quite well: in its last quarterly report revenue increased by 20% compared to the first quarter of 2012, and with margins expanding as well its net income grew 33%. We don’t expect that level of growth to be sustainable for very long, but it may be worth looking into how Waste Connections has been performing so well. Republic Services, Inc. (NYSE:RSG), 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 we would avoid it at this time.
We can also compare the company to Progressive Waste Solutions Ltd (NYSE:BIN) and to US Ecology Inc. (NASDAQ:ECOL). Both of these stocks are valued at more than 20 times their trailing earnings as well, though similarly to Waste Connections they have been recording decent numbers as well: in each case revenue and net income grew at double-digit rates in the company’s most recent quarterly report compared to the same period in the previous year. US Ecology is actually priced about in line with Waste Management, and we’d be interested in looking into why the market is so much less optimistic about it. Progressive Waste Solutions Ltd (NYSE:BIN), with trailing and forward P/Es of 26 and 20 respectively, does seem to have further growth priced in to some degree.
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 recent performance. 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.
Disclosure: I own no shares of any stocks mentioned in this article.
