Neutral on Waste Management - Analyst Blog
11 December 2012 - 1:15AM
Zacks
We are maintaining our Neutral
recommendation on Waste Management Inc. (WM) based
on concerns regarding lower commodity prices, electricity prices
and a challenging pricing scenario. Waste Management currently
maintains a Zacks #3 Rank (Hold) for the short term.
Waste Management’s third quarter
2012 EPS decreased 3% to 61 cents while revenues dipped 2% to
$3.461 billion. Reported EPS was a penny ahead of the Zacks
Consensus Estimate but revenues fell short of the same.
The bright side of the quarter
was the improvement in work-day adjusted volume for the third
quarter in a row, after declining for 23 consecutive quarters. The
last time Waste Management delivered two straight quarters of
volume growth was back in 2005. Volumes were on the decline mainly
based on weak economic environment, pricing, competition and
increased focus on waste reduction and diversion by consumers.
Industrial, special waste and recycling operations saw positive
volume growth. Residential volumes though still lingering in
negative territory, have improved over the last few quarters. Based
on the improving trend, we assume slightly positive volume growth
for 2012.
Waste Management’s acquisition of
Oakleaf Global Holdings will provide North American customers with
unprecedented access to waste and recycling solutions by combining
the largest network of directly owned hauling, recycling, diversion
and disposal assets with the largest managed third-party network.
Post integration, the acquisition is expected to generate a minimum
of $80 million in EBITDA on an annualized basis.
Waste Management recently
announced certain restructuring actions, including doing away with
certain management positions, consolidating some back-office
functions, bringing the overall headcount down by about 700. The
restructuring program is expected to generate $130 million in
annual savings by the beginning of 2013, which are expected to
drive margin improvement in 2013 & beyond.
On the flipside, average
commodity prices have declined since the fourth quarter of 2011,
which has impacted the company’s earnings. Decline in average
recycling commodity prices resulted in a negative impact of 10
cents on the third quarter earnings per share and a 14 cent per
share impact so far in 2012. Commodity price headwinds are expected
to remain in the fourth quarter as well with a likely negative
impact of approximately 4 cents on earnings per share. Waste
Management lowered its 2012 EPS guidance range to $2.08 to $2.13
from its prior range of $2.15 to $2.20 on a lower recycled
commodity price assumption.
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 realized at market rates by the
end of 2012. The company’s exposure to market price volatility or
electricity has increased over the last few years as long-term
power purchase agreements have expired. Electricity prices declined
8% in the first quarter, 10% in the second quarter and 12% in the
third quarter on a year-over-year basis. Electricity prices are
expected to be at low levels in the fourth quarter as well and to
be flat to slightly down annually in fiscal 2012.
Waste Management’s margins have
been affected mainly due to the integration of Oakleaf and higher
materials costs. Based on stabilizing volumes, the company plans to
be more aggressive on pricing in the back half of the year.
Overall, the pricing environment remains challenging and highly
competitive due to aggressive bidding by smaller competitors. We do
not expect any margin improvements until at least 2013.
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
To read this article on Zacks.com click here.
Zacks Investment Research
Casella Waste Systems (NASDAQ:CWST)
Historical Stock Chart
From Jun 2024 to Jul 2024
Casella Waste Systems (NASDAQ:CWST)
Historical Stock Chart
From Jul 2023 to Jul 2024