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Waste Management: The Business of Turning Trash into Treasure.

Opdateret: for 2 dage siden

There might not be a more resilient company than Waste Management. It doesn't matter if there is a long recession, a depression, or a pandemic; people will still need to dispose of their trash. Urbanization and waste recycling trends will benefit Waste Management for years to come. Thus, Waste Management may be the ultimate "sleep-well-at-night" stock to have in one's portfolio. The question is whether now is the right time to invest in Waste Management. This is what I am going to analyze in this post.

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Waste Management. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of Waste Management's direct competitors either. Thus, I have no personal stake in Waste Management. If you want to purchase shares or fractional shares of Waste Management, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

Waste Management was founded in 1969 in Illinois, United States. Waste Management is North America's leading provider of comprehensive environmental solutions, offering services across the United States and Canada. They manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. Waste Management has four operating segments: Collection and Disposal, Recycling Processing and Sales, WM Renewable Energy, and Corporate & Other. Collection and disposal is their largest segment, generating approximately 92% of the revenue. The Collection and Disposal segment involves picking up and transporting waste and recyclable materials from where they were generated to a transfer station, recycling facility, or disposal site. This segment also includes Waste Management's 258 solid waste landfills and five secure hazardous waste landfills, as well as its 332 owned or operated transfer stations in the U.S. and Canada. The Recycling Processing and Sales segment is the second-largest, generating approximately 6% of revenue. The recycling processing and sales segment involves separating reusable materials from the waste stream for processing, resale, or other disposition. WM Renewable Energy segment generates approximately 1,5% of the revenue. The WM Renewable Energy segment converts landfill gas into various sources of renewable energy, including RNG, electricity, capacity, heat, and steam. These are then sold to public utilities, municipal utilities, or power cooperatives. The Corporate & Other segment generates less than 0,5% of the revenue. The Corporate & Other segment includes activities that do not meet the criteria to be aggregated with other operating segments. These activities involve investments in businesses and technologies that are intended to provide services and solutions ancillary or supplementary to their current operations. Waste Management has a moat due to its scalability, as highlighted by the CEO during discussions about acquisitions. Small companies face challenges with labor, which is why they often opt to sell their operations. Waste Management has the scalability to address labor concerns through automation, a capability that smaller companies lack. This is why Waste Management can remain in business and continue to acquire smaller competitors.

The CEO is James C. Fish. He joined Waste Management in 2001 and held various positions in the company until he became the CEO in 2016. Before joining Waste Management, James Fish held finance and revenue management positions at Westex, Trans World Airlines, and America West Airlines. He began his professional career at KPMG Peat Marwick. James Fish earned a Bachelor of Science in Accounting from Arizona State University and an MBA in Finance from the University of Chicago. He is also a certified public accountant. His extensive leadership and operational experience, combined with his profound understanding of the environmental services industry, are crucial for the development and successful execution of Waste Management's growth strategy to deliver shareholder value. James Fish was appointed as CEO because he has consistently delivered results and possesses the skills and leadership qualities that make him ideally suited for the role. He has a deep understanding of Waste Management's strategy, impressive financial and operational acumen, and strong support from employees, customers, and investors. He has a score of 71/100 on Comparably, which places him in the top 35% of companies of similar size. We don't have much information about James Fish, but I appreciate his extensive experience in the industry and the company. I believe he is the right person to lead Waste Management moving forward.

I believe that Waste Management has a moat. I have confidence in the management as well. Now, let's analyze the numbers to determine if Waste Management meets our criteria for possessing a competitive advantage. If you need an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first metric we will investigate is the return on invested capital (ROIC). I would like a 10-year history demonstrating a minimum annual growth of 10%. The numbers are not impressive, as Waste Management has only managed to deliver a Return on Invested Capital (ROIC) above 10% in four years in the past decade. The only positive aspect is that Waste Management has achieved a Return on Invested Capital (ROIC) above 10% in the past two years, and it is hoped that this trend will continue in the future. There is an explanation for the low ROIC, and that is that Waste Management usually operates with a large debt, which affects the ROIC. Later in the analysis, I will share the return on equity (ROE) numbers, which are significantly higher because debt does not affect those numbers. Despite this, the Return on Invested Capital (ROIC) is disappointing.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers are relatively stable as we do not see many significant increases or decreases over the years. There has been a decrease in equity in four out of the ten years, but it is not necessarily something I am worried about. It is also encouraging that the equity has been significantly higher in the past five years compared to the first five years, which indicates a positive trend.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising to note that Waste Management has consistently generated positive free cash flow every year for the past ten years. Free cash flow has remained relatively stable over the years despite the challenges posed by a pandemic and high inflation. It is slightly concerning that the levered free cash flow margin has decreased in the past two years, and excluding 2014, it has reached its lowest levels in the past ten years. The free cash flow yield is the lowest it has been in the past ten years, indicating that the shares are trading at a premium. However, we will delve deeper into this in the analysis.

Another important aspect to consider is the level of debt. It is crucial to determine if a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After analyzing Waste Management's financials, I found that the company has 6,9 years' worth of earnings in debt. It is significantly higher than the three-year threshold and should be monitored closely. Waste Management typically operates with high debt, which is why they have delivered an underwhelming Return on Invested Capital (ROIC). It is evident when looking at the Return on Equity (ROE), which is significantly higher than the ROIC.

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Based on my findings so far, I find Waste Management to be an intriguing company. However, no investment is without risk, and Waste Management also has its fair share of risks. The most obvious risk is debt. In his book "Rule #1 Investing," Phil Town mentions the following about debt: "A business that carries a significant amount of debt compared to its income faces an uncertain financial future." "If there are any problems with the economy, a business with a significant amount of loans might be in big trouble". As an investor, I dislike unpredictability. Although I don't believe that Waste Management will go bankrupt, I am concerned about companies with significant debt. I believe that Waste Management should focus on paying off some of their debt, especially now that interest rates are increasing. Competition. In its annual report, Waste Management states that it faces intense competition from governmental, quasi-governmental, and private entities in all aspects of its operations. They compete with large national waste management companies, counties, and municipalities that maintain their waste collection and disposal operations, as well as regional and local companies of different sizes and financial resources. They also mention that they face intense competition in their solid waste business based on pricing and quality of service. Regulations. Stringent government regulations at the federal, state, provincial, and local levels in the U.S. and Canada have a substantial impact on Waste Management's operations, and compliance with such regulations is costly. Numerous complex laws, rules, orders, and interpretations govern environmental protection, health, safety, land use, zoning, transportation, and related matters. Among other things, governmental regulations and enforcement actions restrict their operations at times and may adversely affect their financial condition, results of operations, and cash flows.

There are also numerous reasons to invest in Waste Management. One reason is the resilient business. Waste Management provides a critical and essential service for residential, commercial, industrial, and municipal entities. Waste generation continues regardless of economic conditions, indicating a persistent demand for Waste Management's services. The constant demand for waste collection, disposal, recycling, and treatment services provides a stable and recurring revenue base for Waste Management. Growing recycling and renewable energy. Waste Management is expanding its recycling and renewable energy business. They expect to commission five new renewable natural gas facilities by the end of 2024, reaching 30% of their current renewable natural gas volume growth rate. They are also on track to complete automation upgrades at 10 recycling facilities and add three recycling facilities in new markets in 2024. Waste Management expects that the demand for Renewable Natural Gas will grow by 4 to 5 times by 2030 due to renewable fuel standards, purchase commitments from utilities, other large companies, and state-level regulatory requirements. Furthermore, they expect margin expansion in their renewable natural gas business. Waste Management also anticipates substantial growth in demand for recycling, projecting a four to fivefold increase in demand for plastic materials alone. Thus, recycling and renewable energy could expand their businesses and increase profitability. Cost reductions. Waste Management continues to make progress in optimizing its cost structure with the help of technology and automation. They use proactive measures to accelerate and improve cost efficiency, including leveraging technology to manage labor, controlling repair and maintenance costs, and optimizing their overall cost structure. For instance, they have been streamlining maintenance processes, which has resulted in enhanced technician productivity, reduced overtime expenses, and diminished reliance on external repair services. This is reflected in the form of reduced repair and maintenance costs in both dollars and as a percentage of revenue in 2023 compared to 2022. As a result, they have observed an expansion of their price-to-cost margin, leading to increased profitability.

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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 5,66, which is from the fiscal year 2023. I have selected a projected future EPS growth rate of 12%. Finbox expects EPS to grow by 12,4% in the next five years. Additionally, I have selected a projected future P/E ratio of 24, which is double the growth rate. This decision is based on Waste Management's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $104,29 We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Waste Management at a price of $52,15 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 4.305, and capital expenditures were 2.799. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 1.959 in our calculations. The tax provision was 745. We have 401,455 outstanding shares. Hence, the calculation will be as follows: (4.305 – 1.959 + 745) / 401,455 x 10 = $76,99 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Waste Management's free cash flow per share at $4,53 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is $56,96.

I find Waste Management to be an interesting company with good management. I am not happy with the large debt, which is why Waste Management has delivered an underwhelming Return on Invested Capital (ROIC) over the past decade. I would like to see management prioritize paying off the debt. Competition is a long-term risk, but I am not worried about it significantly affecting Waste Management in the future due to its strong execution and scale. Regulations are costly and something that Waste Management will continue to have to deal with. While it does affect the profitability of Waste Management, it will also serve as an increased barrier to entry for new competitors. I appreciate Waste Management's operation in a resilient industry. Although its core business may not promise significant growth in the future, it enables Waste Management to sustain dividend payments and even increase them. Growth should come from their renewable energy and recycling businesses, which seem to have a long runway ahead of them, making Waste Management an even more interesting investment. Furthermore, the cost reductions that Waste Management continues to implement should result in higher profitability. I am interested in investing in Waste Management, but due to their high debt, I would require a discount. Thus, I would only invest in Waste Management if it reached $104, which would be below the intrinsic value based on all three of my calculations.

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I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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