Waste Management (WM) Solid Waste Business Strong, Debt High

Waste Management, Inc. (NYSE:WM) core operating initiatives look promising and its solid waste business is in great shape.

In a year’s time, shares of the company have gained 9.9%, outperforming the industry’s 6.2% growth. Waste Management witnessed a 5.4% rise in share price following its third-quarter fiscal 2018 results.

In the last reported quarter, adjusted earnings per share (EPS) came in at $1.15, ahead of the Zacks Consensus Estimate by 5 cents and increased 27.8% year over year. Total revenues of $3.82 billion missed the consensus mark by $2 million but improved 2.9% 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 4.5%. Over the past 30 days, the Zacks Consensus Estimate for fourth-quarter earnings has been revised 1.9% upward.

What’s Driving Waste Management?

Waste Management continues to execute its core operating objectives of focused differentiation and continuous improvement, and instill price and cost discipline to achieve better margins. Focused differentiation through capitalization of extensive assets ensures profitable growth and competitive advantages. The acquisition of Anderson Rubbish Disposal and Moorpark Rubbish Disposal will further help the company to strengthen its existing operations. A steady stream of such accretive acquisitions is likely to drive future earnings.

The company’s solid waste business seems to be in great shape and continues to benefit its cash and earnings. The third quarter of 2018 marked its sixth consecutive quarter of more than 2% growth in price and volume. Moving ahead, Waste Management expects yield momentum to continue in its solid waste lines of business.

Cost-reduction initiatives have helped Waste Management achieve significant EBITDA growth over the quarters and are expected to continue in the quarters to come. In third-quarter 2018, adjusted operating EBITDA improved 3.4% year over year. For 2018, the company expects adjusted operating EBITDA in the range of $4.20-$4.22 billion.

Waste Management is increasingly focusing on maximizing return on disposal network. A strong economy and benefits of volumes from third-party haulers selecting the company’s close-end disposal sites are leading to increased volume being disposed of at its facilities. The company is seeing an opportunity to leverage on logistical benefits of its disposal network and increase returns on large investment in the network.

Risks

Waste Management’s balance sheet is highly leveraged. As of Sep 30, 2018, long-term debt was $9.56 billion, while cash and cash equivalents were $83 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 and Stocks to Consider

Waste Management currently has a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader Business Services sector include Broadridge Financial Solutions, Inc. (NYSE:BR) , Genpact Limited (NYSE:G) and WEX Inc. (NYSE:WEX) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term expected EPS (three to five years) growth rate for Broadridge, Genpact and WEX is 10%, 10% and 15% respectively.

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