Neutral on Waste Management - Analyst Blog
17 April 2012 - 1:15AM
Zacks
We maintain our Neutral
recommendation on Waste Management Inc. (WM). The
company is the largest provider of comprehensive waste management
services in North America.
Waste Management recorded a 5% rise
in earnings per share to 63 cents on the back of a 7% increase in
revenues to $3.4 billion in the fourth quarter of 2011. Both the
figures outperformed the respective Zacks Consensus Estimates.
Waste Management’s recent
acquisition of Oakleaf Global Holdings will provide North American
customers with unprecedented access to waste and recycling
solutions by pairing the largest network of directly owned hauling,
recycling, diversion and disposal assets with the largest managed
third-party network. The Oakleaf integration is on track and
benefits are targeted by the second half of 2012. Subsequent to the
completion of integration, the company expects to generate a
minimum of $80 million in EBITDA on an annualized basis.
2011 marked the ninth consecutive
year of a quarterly dividend hike. The dividend has grown from 1
cent a share in 2003 to $1.42 in 2011. The current dividend yield
came in at 4.1%. In 2012, Waste Management plans to return up to
$1.2 billion to its shareholders through a combination of dividends
and share repurchases. Backed by its strong cash flow, Waste
Management is expected to announce yet another dividend hike this
year. The board has also authorized up to $500 million in share
repurchases.
Waste Management’s cost cutting
efforts helped the company to maintain its profits despite weaker
volumes. Cost cuts for the year were attained through better supply
chain management. These savings are expected to accelerate in 2012.
Furthermore, the company will resort to additional cost reductions
such as improvement in delivery of services in the field through
more efficient routes, reduced unproductive time, and better
customer support with greater use of onboard computing technology
and reengineering field processes. We believe cost-saving and
efficiency initiatives should continue to benefit the bottom line
in 2012 and thereafter.
Waste Management has nevertheless
recorded declines in volumes in the recent past due to the overall
macro weakness, pricing pressure from competition, and a reduction
on part of clients to reduce their waste. Though still declining,
the year 2011 saw some recovery in output. Each of the collection
and municipal solid waste landfill lines of business has improved
sequentially for three consecutive quarters. The company also
continues to benefit from strong growth in special waste and
recycling commodity volumes. Based on the improving trend,
management’s guidance assumes flat to slightly positive volume
growth for 2012.
As a caveat, the first quarter is
seasonally weak for Waste Management. As municipalities look to cut
expenses in the face of budget shortfalls, Waste Management would
be compelled to roll back some price increases in order to retain
municipal contracts in the first half of fiscal 2012.
Besides, the integration of Oakleaf will dilute earnings in
the first half of the year with benefits beginning to accrue latter
in the year.
Waste Management’s recycling
operations process for sale certain recyclable materials, including
fibers, aluminum and glass, all of which are subject to significant
market price fluctuations. For the first nine months of 2011,
overall commodity prices increased approximately 26% year over
year. However, during the fourth quarter of 2011, the company
witnessed a decline in commodity prices of approximately 8% due to
increased supply and lower demand. Waste Management may face
significant headwinds if such a trend continues.
During 2011, approximately 54% of
the electricity revenue at Waste Management’s waste-to-energy
facilities was subject to current market rates. The company
estimates that nearly 56% of its electricity revenue at its
waste-to-energy facilities will be at market rates by the end of
2012. The company’s exposure to market price volatility has
increased over the last few years as long-term power purchase
agreements have expired. Electricity prices have remained
stubbornly low and are expected to be at low levels in the first
half of 2012 as well.
To sum up, we maintain our Neutral
recommendation on Waste Management, with the rewards balancing out
the risks. We intend to hold a more positive stance when Waste
Management’s cost cutting and growth initiatives bear fruit. The
quantitative Zacks #3 Rank (short-term Hold rating) for the company
indicates no clear directional pressure on the shares over the near
term.
Waste Management is the largest
provider of comprehensive waste management services in North
America. The company provides collection, transfer, recycling and
resource recovery, as well as disposal services to nearly 20
million residential, commercial, industrial and municipal
customers. It competes with Republic Services,
Inc. (RSG) and Casella Waste Systems Inc.
(CWST).
CASELLA WASTE (CWST): Free Stock Analysis Report
REPUBLIC SVCS (RSG): Free Stock Analysis Report
WASTE MGMT-NEW (WM): Free Stock Analysis Report
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