Waste Management (WM, Financial) has enhanced shareholder value by selling its non-strategic operations at Eastern Canada and Puerto Rico and other non-core Wheelabrator operations for approximately $2 billion. Waste Management also delivered non-GAAP total free cash flows of approximately $1.4 billion.
Smart strategies
Going forward, Waste Management estimates to sign an acquisition agreement to substitute several of its non-core assets. However, it targets on remaining disciplined while purchasing an asset. The key divestment of Wheelabrator is believed to provide nearly $400 million of proceeds to the company to successfully execute the share buybacks or other core tuck-in acquisitions. Waste Management estimates that by midyear, it would be in a solid position to start buying back shares, and it expects to buy back sufficient shares to at least balance any 2015 dilution.
The significant and key share buyback program of Waste Management along with the company’s major step to sell off its non-core operations at Wheelabrator, Puerto Rico and Eastern Canada is estimated to improve the company’s overall profitability and deliver superior shareholder returns.
Waste Management is sharply focused on leveraging price to enhance dollars to its bottom line and identify the impact of pricing on the bottom-line. The major pricing at approximately 3.8% or better is believed to significantly and continuously expand margins in the fiscal year 2015.
Although for the complete year, Waste Management volume was a negative 1.4% and in line with the expectations, however, since the fourth quarter of 2013, the company has witnessed a continued enhancement in volumes, concluding with the fourth quarter illustrating the highest volume during 2014 at about negative 0.8%. Moreover, there was continued improvement in the volumes in all lines of business compared to the third quarter of 2014. Further, volume declines in both residential owned service and commercial yards steadily enhanced in 2014.
The ongoing improvement in the quarterly volumes for this year compared to the same quarter last year along with the strategic usage of dollar for offsetting the declining pricing scenario is estimated to significantly expand the company’s top line and hence, grow shareholder returns, going forward.
Strong operational growth
Considering the recycling business segment, the operations of Waste Management performed superbly even in a falling commodity pricing environment. For the entire year 2014, its recycling business segment enhanced approximately $0.03 per share as compared to the last year. This key enhancement was primarily driven by superior operating cost performance, balancing an over 5% fall in OCC prices.
Waste Management generated $3.4 billion of free cash flow in 2014 and exceeding its 2014 guidance in $1.4 billion to $1.5 billion range. The company estimates to deliver free cash flow in $1.4 billion to $1.5 billion range during 2015, driven by a keen focus on planned capital spending and accelerating earnings growth in its major business. Therefore, the fiscal year 2015 is believed to be a transition year with Waste Management significantly implementing its cost control initiatives, while targeting on redistributing its Wheelabrator proceeds. However, the company’s guidance for adjusted EPS for the complete year 2015 is believed to be in $2.48 to $2.55 range, depicting a growth in 8% to 11% range compared to last year and in line with its long-term goal for EPS expansion in 8% to 12% range. Moving ahead, free cash flow is estimated to be solid.
The superior performance of the company’s recycling business segment highlights the deep understanding of the management regarding the cost control and maintaining improved profitability even in a poorly priced working environment.
Stifel downgraded Waste Management, Inc. to Hold from Buy primarily driven by the estimated headwinds from reduced 2015 paper prices, foreign currency, fuel surcharges and declining free-cash-flows.
The well-established operations of Waste Management are believed to provide a unique competitive advantage to the company and enable it to grow solid shareholder returns.
Conclusion
Overall, the investors are advised to invest into the Waste Management, Inc. looking at the logical company valuations with the trailing P/E and forward P/E ratios of 19.41 and 19.89 respectively. Also, it’s better than the industry’s average P/E of 28.63 which signifies that the stock is comparatively cheaper.
The PEG ratio of 3.87 is poorer compared to the industry’s average of 2.12 and depicts somewhat slower company growth as compared to the industry. The profit margin of 9.27% is satisfactory. However, Waste Management needs to optimize its significantly debt-laden balance sheet with a huge total debt of $9.44 billion against weaker total cash of $1.31 billion only, restricting the company to plan for future growth investments.
