Time To Sell Waste Management, A High Debt And Low Growth Trash Collector (NYSE:WM)

Research Note Summary

In today’s research note, I have the opportunity to get my hands dirty.

Not literally, of course!

My analysis will discuss a major player in the environmental / facilities services sector, namely Houston Texas-based Waste Management (NYSE:WM).

Today’s note calls for a sell rating on this stock and here is why:

Positive points include 3-year dividend growth, positive cash flow, and above-average return on equity.

Negative points include below-average dividend yield, lackluster revenue and earnings growth, declining equity, and underperformance vs the S&P500 index.

A key risk is the high debt load and rising interest expenses of this company.

Methodology Used

My WholeScore Rating methodology considers the stock holistically across several categories as well as analyzing key risks and then assigns a rating score. I exclusively cover stocks and foreign ADRs that are dividend-paying stocks and trade on major US exchanges only (NYSE, Nasdaq).

Some of the financial data comes from the recent FY23 Q3 results from Oct. 24th, while the forward-looking sentiment relates to the upcoming FY23 Q4 earnings results not expected until Jan. 31st.

Growth vs Industry Peers

I put together the following table of 5 peers in the environmental and facilities services sector based on the criteria that all be larger, US-based peers trading on the NYSE, and offering similar services.

This industry runs a plethora of trash collection for both residential and business, but also recycling solutions. This makes it what I call a critical infrastructure industry because both trash and recycling are an everyday need everyone has that someone has to deal with, or it would just pile up and imagine what that would look like in our cities!

However, as the table shows, my subject company Waste Management is trailing far behind this peer group in terms of YoY revenue growth and missed my goal. In fact, it is almost 6% below the peer group average for growth.

This type of business is impacted by the volume of work, and it seems that is the case here with this company.

According to its Q3 earnings comments:

On a reported basis, total Company volumes increased 0.5% and collection and disposal volumes increased 0.3% in the third quarter of 2023 compared to 1.0% and 1.4%, respectively, in the third quarter of 2022.

So, Q4 results on the revenue side could see improvement if volume also does so, I think. Unfortunately, the company did not provide much in the way of forward-looking positive sentiment on volume increases or increased revenue guidance.

A positive call out to mention about this company is that it is still a market leader in this space, despite current revenue headwinds.

For example, data collection site Statista listed Waste Management at the top of the pack of waste management companies in the US in 2022:

What we can also learn is that the sector itself has a massive market opportunity for the next several decades, according to this data from Statista:

Financial Statements

In the following table I made, we can see a mixed bag of results from the company’s income statement, cash flow statement, and balance sheet.

Both revenue and net income increased on a YoY basis, however, not quite to meet my goal of a 5% or better YoY growth, a benchmark in all of my most recent articles. So, they are improving but not exactly outstanding.

The free cash flow per share looked a lot better, seeing an almost 42% YoY growth and beating my goal by a lot.

One area that saw a YoY decline was shareholder equity, so that missed my goal too. Later on, I will describe what I see as a high-debt company that is impacting equity.

From the company’s Q3 release last week, which is still fresh, we can see two segments driving declines in operating revenue, recycling and renewable energy.

In recycling, the decline was “driven by the approximately 40% decrease in market prices for single-stream recycled commodities.”

In renewable energy, the decline was “driven by decreases in the value of energy prices and renewable fuel standard credits.”

What is helping profitability is an effort by the company to contain costs, which was highlighted in an Oct 27th article in The Houston Business Journal:

While Houston-based Waste Management Inc. is rolling out more sustainability projects, the company also is finding ways to use automation and technology to reduce its headcount — and thus expenses, officials said during WM’s earnings call for the third quarter of 2023.

From the evidence, my impression of this company is one of lackluster but positive revenue growth, improving and manageable profitability, and positive cash flow, but facing headwinds to equity.

Dividends

As someone with a dividend-focused portfolio, the questions I ask are whether this stock’s dividend yield is beating its sector average and whether the quarterly dividend has seen a 3-year growth trend.

From the table I created using dividend data, we can see that when comparing the dividend from last month with the same month three years ago it actually saw a 27% growth, which beats my target of 5%.

Although the dividend yield of 1.74% beat its sector average, it came short of my target.

A company in this peer group that beats the average on dividend yield is actually ABM Industries (ABM), whose dividend yield of 2.24% beats the average by 35%. It also saw a 3-year dividend growth as well.

Share Price vs Moving Average

In my latest portfolio idea strategy, I have been looking for a buy price that does a crossover below the 200-day moving average which I am tracking.

That crossover opportunity seems to have been missed recently, as the chart shows, as the price has rebounded abruptly back above the moving average again. The average itself seems to be plateauing.

The share price therefore did not meet my goal, from my table below.

The opportunity I see in this chart is not one of a value buy but one of a sell opportunity if I had been buying into this stock at its March lows. I mean, I would be looking at around an $11/share profit on a sell right now. That is a nice price spread, I think.

Performance vs S&P500 Index

In terms of the market momentum this stock has seen, it has been weak in comparison to the S&P500 index, as my table below shows its 1-year price performance being 76% lower than the index.

This is more evidence of market headwinds for this stock.

It is not necessarily a problem with the entire peer group. For example, its peer Enviri Corp (NVRI) has a market momentum outperforming the S&P500 and a 1-year price return of 18.39%.

Another peer, Clean Harbors (CLH), has seen a 1-year price return of 26.3%, also outperforming the index.

What is interesting is Clean Harbors’ long-term debt has declined on a YoY basis, so that along with being top of my peer group for YoY revenue growth makes that a much more attractive play in my opinion.

Valuation and ROE

Two metrics stick out when it comes to the valuation of this stock, and that is a highly overvalued forward P/E ratio, but also an overvalued P/B ratio, as you can see from my table:

The bright spot in this is the return on equity, which is almost 148% above its sector average. However, let’s keep in mind that equity also saw a decline.

What I think is driving the high P/E is not a drop in earnings, since they saw an improvement, but rather a jump in the share price, likely after the recent Q3 earnings results showed a positive YoY revenue and earnings growth. So, it is the “price” side of the P/E that I think is driving it.

I think the extremely high price-to-book ratio is driven by a declining equity/book value, which I have shown earlier.

Key Risks

Understandably, this is a very capital-intensive industry, requiring fleets of trucks as well as facilities, logistics, infrastructure, and so on. So, I can see the “why” behind taking on debt.

However, what I am looking to spot is trends, such as whether that debt is growing or decreasing.

Unfortunately, when comparing long-term debt from March 2022 with the most recent quarter, it saw a 17% growth. Not exactly a great trend, I think, nor great on the balance sheet in terms of its impact on equity.

What does that mean for the income statement? In this case, it seems to translate to increased interest expenses. In fact, comparing June 2022 with the recent quarter, this company saw a 37% increase in the cost of interest payments. In the current environment of high interest rates, this also does not help the picture.

The key risks associated with this stock have been looked at and my risk score determined that it exceeds my risk tolerance, so I am dinging this stock with a minus -1 on its rating today for this reason.

In comparison to some of its peers mentioned, Republic Services (RSG) has a declining YoY long-term debt, as does Clean Harbors, so they appear to have a lower risk profile in this regard.

WholeScore Rating

For today’s research note, I gave this stock a WholeScore of 2, which earned a “Sell” rating.

To compare my rating with that of the consensus, I am actually more bearish on this stock than analysts, Wall Street, and quant system.

My Forward-Looking Sentiment

As I have already established that this is a critical infrastructure industry that is necessary for the everyday economy and that the market for waste management is expected to exponentially continue growing, I think if considering this sector I have shown that other stocks may be better than Waste Management, as it is struggling among its peer group in several metrics.

At the same time, its chart presents an interesting selling opportunity if looking to take the capital gain from spring price lows. I don’t expect a lot of upside on the price looking forward unless it can really beat earnings estimates for Q4 by a lot. So far, it has only beaten 2 of the last 4 quarterly estimates, so I am cautious on this one.