Waste Management, Inc. (WM): Making Money From Trash With This Stock

Waste Connections, Inc. (NYSE:WCN) is the third-largest solid-waste-management company in North America and differentiates itself from Waste Management by focusing on secondary markets where it has at least a number-two market position. In addition, it diversified into oilfield waste in 2010 which now accounts for about 13% of its revenue. This oilfield waste is expected to grow on the back of drivers such as increased drilling in unconventional areas and tightening environmental regulations.

It achieved a good set of results for the first quarter of fiscal 2013, growing its quarterly net income by 33% as a result of a spike in exploration and production activity. I am concerned about the increased cyclicality of Waste Connections, given its expanding oilfield-waste business.

Heritage-Crystal Clean, Inc. (NASDAQ:HCCI) is the second-largest domestic provider of parts-cleaning services and the second-largest re-refiner in North America. It is also a provider of hazardous and non-hazardous waste services to its clients. Similar to Waste Management, scale and regulatory approvals are the biggest barriers to entry for its competitors in its parts-cleaning core business. New entrants will need to devote a significant amount of effort to building a branch service and transportation network of comparable scale and obtaining the necessary environmental permits regulating parts-cleaning-units emissions.

Its used oil-collection and re-refining business has huge potential for growth, but also represents a source of instability. It registered a loss of $0.02 per share in the first quarter of fiscal 2013 largely because of negative base-oil pricing trends impacting profitability. I am negative on Heritage-Crystal Clean, as it is affected by commodity price swings and does not pay a dividend. In contrast, Waste Management sports a forward dividend yield of 3.5%.

Conclusion

I like Waste Management for its strong regulatory barriers to entry and its recurring non-cyclical nature of revenue. Despite this, it is currently reasonably valued at 17.6 times forward P/E.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Waste Management. The Motley Fool owns shares of Waste Management.

The article Making Money From Trash With This Stock originally appeared on Fool.com and is written by Mark Lin.

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

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