Wide moat boosts Waste Management (WMI)
"We still see a rocky road ahead this year; however, November appears to have put an important stock market bottom in place," says Jim Stack, who accurately foresaw the derivatives and housing crisis, and the market decline.
In his InvesTech Market Analyst he adds, "We are selectively taking advantage of deep values such as Waste Management (NTSE: WMI), which is selling at a compelling valuation."
"Waste Management displays the characteristics we search for in new investments including a distinct competitive advantage and solid financials. It is a giant in its industry; Waste Management is the largest solid waste management company in North America.
"Founded in 1894, it serves nearly 20 million customers in the commercial, industrial, municipal and residential markets.
"Its services include waste collection, transfer, disposal, recycling and resource recovery. Waste Management handles 130+ million tons of disposal each year, representing a 40-45% share of the waste disposal market.
"WMI operates through a network of nearly 300 landfills in North America. Dominant landfill ownership provides this company a wide moat and discourages competition as landfills are difficult to develop due to the need for zoning approvals and permits.
"With the nation’s largest network of landfills, Waste Management has significant pricing power and can charge fees to competitive waste haulers who don’t own, or have access to, their own landfills.
"The company is vertically integrated and includes divisions for recycling and waste-to-energy, allowing customers to not only manage, but minimize, their waste.
"It also owns or operates 16 waste-to-energy facilities and five independent power production plants where solid waste is converted to steam and sold to commercial and industrial users and electric utilities. These portions of the business could show strong growth as 'green' initiatives continue to gain momentum.
"Waste Management is the industry leader and its size, market share, and vertical integration provide distinct competitive advantages.
"Waste Management boasts a strong balance sheet with free cash flow of $260 million. The company has exhibited good cost control, increasing operating margins from 24% in 2004 to nearly 27% currently.
"Return on Equity, a measure of profitability, has also improved from 13% five years ago to 19%. While the company’s debt level is a little higher than we would like at 56% of capital, it is in line with historic levels and debt service is adequately covered with operating income equivalent to four times interest payments.
"The stock currently yields 3.3%, well above the S&P average, and the dividend is sufficiently protected with less than a 50% payout ratio. In fact, the company has announced it will raise the dividend by 7.4% to $1.16 per share in 2009.
"This firm’s dedication to increasing shareholder value is evidenced by their 2009 expenditure plan which allocates $1.3 billion to dividends, common stock repurchases, debt reductions and acquisitions.
"In November, WMI warned that Q4 profits would be dampened due to the falling value of recycled commodities. Also, weakness in the economy portends lower waste volumes particularly in the residential and industrial segments.
"However, the strength of this company’s business model has been evident in past recessions due to the essential nature of their business. The firm has also shown good pricing power which should help offset reduced demand.
"In addition, the bottom line should be buffered by lower fuel costs. Earnings estimates for 2009 have been reduced, but are still projected above 2008 levels.
"Waste Management is currently selling at valuation levels equivalent to those at the end of the 2000-2002 bear market. Primary valuation metrics, including Price/Cash Flow, Price/Revenue and Price/Earnings, are all well below their 10-year medians.
"With its strong competitive advantages, solid financials and very attractive price level, Waste Management makes a compelling addition to the Model Portfolio. Moreover, we believe this stock will remain fairly stable, even in a prolonged recession, and should definitely benefit from any economic recovery."
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