The stock of Waste Management (NYSE:WM, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $129.5 per share and the market cap of $54.8 billion, Waste Management stock is believed to be modestly overvalued. GF Value for Waste Management is shown in the chart below.
Because Waste Management is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 3% over the past three years and is estimated to grow 4.82% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Waste Management has a cash-to-debt ratio of 0.04, which is in the bottom 10% of the companies in Waste Management industry. GuruFocus ranks the overall financial strength of Waste Management at 4 out of 10, which indicates that the financial strength of Waste Management is poor. This is the debt and cash of Waste Management over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Waste Management has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $15.2 billion and earnings of $3.52 a share. Its operating margin is 16.28%, which ranks better than 73% of the companies in Waste Management industry. Overall, the profitability of Waste Management is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Waste Management over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Waste Management is 3%, which ranks in the middle range of the companies in Waste Management industry. The 3-year average EBITDA growth is 1.8%, which ranks worse than 66% of the companies in Waste Management industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Waste Management's ROIC was 8.24, while its WACC came in at 5.63. The historical ROIC vs WACC comparison of Waste Management is shown below:
To conclude, the stock of Waste Management (NYSE:WM, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 66% of the companies in Waste Management industry. To learn more about Waste Management stock, you can check out its 30-year Financials here.
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