Published:
April 21, 2008
Waste Management
(NYSE: WMI, $35.76)
is the largest provider of
municipal solid waste management in the U.S. with a
roughly 26% share of the $52 billion industry.
Roughly 64% of revenues come from waste collection fees, 22%
from landfill-related tipping fees, 9% from recycling
and 5% from WMI's waste-to-energy operation,
Wheelabrator.
Competitive Advantages:
WMI's primary competitive advantage lies in its unparalleled
network of landfill capacity. In total, WMI owns or operates
283 landfills in the U.S. -- capable of handling some 116 million
tons of waste per year. This represents the largest number
of landfills of any U.S. waste management firm.
Even better, WMI's landfills are far from full -- the
company estimates that its facilities have 30 years of life
left. That means WMI could keep
collecting and
depositing waste at its current rate for roughly three decades
without running out of capacity. Currently, WMI has filed for
expansion permits for more than 50 of its existing facilities;
if all those permits are granted, then WMI's remaining landfill life
will top 37 years.
And WMI's landfills are well-diversified geographically, meaning
WMI has access to landfill capacity in just about every
imaginable market for waste disposal. In total, about 70% of WMI's markets include both collection and landfill capacity.
And in addition to plain vanilla landfills, WMI has a huge
network of other waste disposal facilities. The list includes
131 waste recycling centers capable of handling 8 million tons
of recyclable materials per year -- the largest network of
recycling capacity of any waste management firm. And WMI also
owns 370 transfer facilities used to temporarily hold and
consolidate waste before transport to landfills.
Given the extensive regulatory barriers for building new
landfill, recycling, and transfer station capacity, it would be
very difficult, time-consuming, and expensive for a competitor to
recreate WMI's asset base. And since the top three waste
management players own nearly two-thirds of U.S. landfill
capacity, it would be impossible for a competitor to buy up
small landfill owners to recreate WMI's capacity.
This gives WMI two key advantages. First, the company
internalizes the majority of its waste volumes, meaning it both
collects and landfills its own waste. In addition, the company
can charge lucrative tipping fees for competitors to dispose of
waste on its properties or in its recycling centers.
Growth Drivers:
The main growth driver for WMI is a renewed focus on
profitability over volume growth. WMI has been purposely giving
up business and waste volumes in recent years.
The reason is simple -- WMI is allowing marginally profitable
collection contracts to expire, and management has refused to bid
aggressively just to win business. Instead, the company has been
refocusing attention only on markets where it has a competitive
advantage because it owns both landfill capacity and collection
infrastructure. Due to the size of WMI's landfill network, this
focus still leaves plenty of high-potential markets, and the end
result of these measures has been strong growth in
profitability.
Since total waste volumes processed by WMI have been falling
over the past couple of years, the firm's recent growth is a
direct result of efforts to increase pricing and focus only on
the most profitable contracts. Overall operating margins -- a
measure of operating profits divided by total revenues -- jumped
from 15.6% in 2006 to 16.9% in 2007. With a significant number
of important contracts due to reset in 2008, WMI has plenty of
additional room to fuel growth by raising prices in markets
where it has a near-monopolistic position.
Valuation and Outlook:
WMI trades at 14 times estimated 2009 earnings and sports a
long-term growth rate of +11%. That yields a P/E-to-growth ratio (PEG) of 1.3 -- a
cheap valuation for a company with such a steady earnings profile.
Even better, WMI's renewed focus on its most
profitable markets has led to a surge in free cash flow
generation. WMI generated nearly $1.2 billion in free cash flow
for 2007. In 2008, WMI expects to generate enough free cash flow
to pay $530 million in total dividends and manage $870 million
in stock repurchases. Both repurchases and rising
dividend payouts are shareholder-friendly moves for WMI.
Finally, while WMI's Wheelabrator waste-to-energy business
accounts for only a small chunk of total revenues, it's still
the second-largest waste-to-energy player in the world.
Wheelabrator is expecting decisions on five new waste-to-energy
projects for 2008; contract wins for this business could expand
its importance to WMI's revenue pie and offer an additional
upside catalyst for the shares.
With all of these factors in
mind, WMI looks like a solid recession-proof "Buy" at
any price below $45 per share.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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