In this article, let's take a look at Waste Management Inc. (WM, Financial), a $24.33 billion market cap company, which is the largest U.S. trash hauling/disposal concern.
Pricing Pressure
Current macro conditions continue to place pressure on customers and led to higher prices. Further, the waste generation is lower than in the U.S. housing boom. Moreover, it is a higher-margin business, so competition is always a threat.
These things couldlead to pricing pressure and makes it difficult for the company to surpass it. Nevertheless, we still believe that waste volumes would recover in the future so we think the firmcould sustain price increases.
Revenues and Profitability
Looking at profitability,revenuesdeclined by 0.53% and led earnings per share decreased in the most recent quarter compared to the samequarter a year ago ($0.58vs $0.62).During the past fiscal year, the company reported lower earnings of $0.21 versus $1.76 in the previous year. This year, Wall Street expects an improvement in earnings ($2.41 versus $0.21).
The net income has decreased by 7.2% when compared to the same quarter one year ago, from $291 million to $270 million.
Margins
The gross profit margin is consideredhigh, at 36.81% and it hasincreased from the same quarter the previous year. The net margin is low but it is ranked higher than 68% of the 183 Companies in the Waste Management industry. The operating leverage could lead to higher operating margins.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| WM | Waste Management | 1.75 |
| ECOL | US EcologyInc | 17.79 |
| ROL | Rollins Inc | 30.00 |
| WCN | Waste Connections Inc | 10.58 |
| CLH | Clean Harbors Inc | -2.00 |
| Â | Industry Median | 1.47 |
The company has a current ROE of 1.75% which is lower than its peers like Waste Connections (WCN, Financial) but higher than the one exhibit by Clean Harbors (CLH, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, US Ecology (ECOL, Financial) and Rollins (ROL, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 235.1x, trading at a premium compared to the industry. To use another metric, its price-to-book ratio of 4.53x indicates a premiumversus the industry average of 2.22x while the price-to-sales ratio of 1.77x is above the industry average of 1.07x. These ratios indicate that the stock is relatively overvalued and seems to be quite expensive.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
The share price has jumped by 27.78% year-to-date, beating theperformance of the market.
Growth of 10,000
If you had invested $10.000 five years ago, today you could have $18.968, which represents a 14.8% compound annual growth rate (CAGR).
Final Comment
As outlined in the article, the economic conditions continue to place pressure in prices as well as an increased competition.
Hedge fund gurus like Ray Dalio (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), David Dreman (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and John Buckingham (Trades, Portfolio) added this stock to their portfolios in thethird quarter of 2014, as well as Manning & Napier Advisors, Inc. But the PE relative valuation and the low levels of the return on equity make me feel bearish on this stock.
Disclosure: Omar Venerio holds no position in any stocks mentioned
