Waste Management (WM) Implements Cost Discipline, Debt High

Waste Management, Inc.’s (NYSE:WM) cost-management initiatives look promising and its waste business is in good shape.

In the last reported quarter, the company’s adjusted EPS came in at $1.13, which beat the Zacks Consensus Estimate by 6 cents and increased 32.9% year over year. Total revenues of $3.84 billion surpassed the consensus mark by $55 million and improved 5.2% year over year.

The company has an impressive earnings surprise history, having outpaced estimates in three of the last four quarters. It delivered an average four-quarter positive earnings surprise of 5.3%. In the past 30 days, the Zacks Consensus Estimate for first-quarter earnings has been revised 1.1% upward.

What’s Driving Waste Management?

Rising environmental concerns are expected to enhance business opportunities for waste management industry players. Stringent government rules and regulations for sustainable waste management and increasing number of initiatives undertaken to put a check on illegal dumping should drive demand for the company’s services.

Waste Management continues to focus on differentiation and improvement, and instill price and cost discipline to achieve better margins. Cost-reduction initiatives have helped the company achieve significant EBITDA growth over the quarters and are expected to continue in the quarters to come. The acquisition of Anderson Rubbish Disposal and Moorpark Rubbish Disposal are helping the company to strengthen its existing operations.

The company’s solid waste business is in good shape and continues to benefit cash and earnings. In 2018, total internal revenue growth of the business from volume was 2.9% and margin expanded 50 basis points.

Risks

Waste Management’s balance sheet is highly leveraged. As of Dec 31, 2018, long-term debt was $9.59 billion while cash and cash equivalents were $61 million. Such a cash position implies that the company needs to generate an adequate amount of operating cash flow to pay its debt. Moreover, a high debt may limit its future expansion and worsen its risk profile.

Seasonality causes considerable fluctuations in Waste Management’s revenues. Revenues in first and fourth quarters are significantly lower than second and third quarters. This is because construction and demolition waste volumes, and industrial and residential waste volumes are typically low during periods other than summer.

Zacks Rank & Upcoming Releases

Waste Management currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Investors interested in the broader Zacks Business Services sector are keenly awaiting fourth-quarter 2018 reports of key players like Navigant Consulting (NYSE:NCI) , FTI Consulting (NYSE:FCN) and ICFI International (NASDAQ:ICFI) . All these companies are slated to release quarterly numbers on Feb 26.

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