Is Waste Management Stock Overvalued?

Waste Management, Inc. (NYSE:WM) is the leading waste management and environmental services company in North America.

This Texas-based company operates 146 recycling plant, 239 landfills, 346 waste transfer stations, and over 26,000 trash collection vehicles, along with six independent power plants.

Along with competitor Republic Services, Inc. (NYSE:RSG), the two companies service 50 percent of the country’s trash. But as it hovers around $50 billion market cap, some investors wonder – is Waste Management stock overvalued?

The company took measures to stay in business during the coronavirus lockdown, including discontinuing bulk goods and yard waste collection. It also lowered some fees and price increases to keep its contracts in place. This helped the company fight falling revenues and limit it to only 5 percent for the year by most analysts’ estimates.

And it has multiple revenue streams to help it pivot as necessary to keep up with economic conditions, including a pending $1.8 billion acquisition of rival Advanced Disposal. Let’s see whether the investment is worthwhile today.

Why Waste Management Stock Went Up

Besides being the industry leader, Waste Management has a good balance sheet, which we’ll discuss more in the next section. The industry is seen as a safe place to store money by investors, because municipal and commercial trash services will continue to be needed throughout any economic times.

The company was founded in 1968 and has an established network of waste management vehicles and facilities. It solidified its position by purchasing Advanced Disposal with great timing that gave it a $300 million discount.

It also has a history of outperforming the S&P 500 any time the economy has slowed. Waste Management has diverse revenue streams coming from collection (residential, industrial, and commercial), transfer, landfill, recycling, and more.

This makes it a resilient investment during a recession like we’re facing in 2021. While the company is at risk of losing some contracts, it mitigated this risk by offering discounted fees to ensure continued long-term contractual sustainability.

On top of its performance, WM raised its quarterly dividend from $0.512 to $0.545, or $2.18 annually per share. This has investors buzzing about the company, but let’s check out its financial reports.

Waste Management Financials

Waste Management is recession-resistant, but even it took a financial hit from the 2020 coronavirus pandemic. In the second quarter, it reported $3.56 billion in revenue, compared to $3.95 billion in the same period of 2019. This represents nearly a 10 percent decline and is largely driven by its temporarily discounted fees.

The company still pulled in $15.103 billion of revenue in the trailing 12-month period, which only represents a 1.33 percent decline. Its profit from that income for that year period was $5.839 billion, which is a 0.45 percent increase from the previous year.

Commercial collection and landfills make up the bulk of the company’s revenue, at 22.5 percent and 19.9 percent, respectively.

Residential and Industrial collection each make up just under 15 percent, with transfers accounting for 10 percent and recycling accounting for 6 percent.

The rest of the company’s revenue comes from a variety of streams. Baseline demand for the company’s services will remain steady because garbage collection is an essential service, with the U.S. producing approximately 4.51 pounds of garbage per person every day, according to the Environmental Protection Agency.

Is Waste Management Valuation Too High?

In the fourth quarter of 2020, Waste Management is trading in the $120 range. This gives it a market cap of approximately $50 billion, which is about three times annual revenue and about eight times annual profits.

What gives the company its biggest advantage is the necessity of the business. Landfills alone house over 140 million tons of garbage each year.

The need for recycling and composting is a major challenge facing our generation, and Waste Management is at the forefront of these recycling efforts.

Waste Management is second only to municipal landfills. Combined, they account for 53 percent of the landfill industry. Its biggest commercial competitor is Republic Services, which has 20 percent of the market.

Waste collection itself is a $51.7 billion industry in 2020, employing over 455,000 people and continuing to grow. It’s a well-paying job too, with employees making an average of $25 per hour on the job.

Its acquisition of Advanced Disposal gave the company an additional 2.7 million residential and 200,000 commercial and industrial customers.

It also gained 41 landfills, and 18 landfill gas-to-energy conversion facilities. That company generated $1.6 billion in revenue in 2019, and this will help the company maintain earnings.

Not only is WM not valued too high, but there’s a chance it may be discounted heading toward its next earnings call.

Will Waste Management Stock Drop?

The entire stock market is poised for a slow decline over the next couple of years, and Waste Management is no different. However, as time has proven during previous recessions, WM will decline much slower than the general market and should outperform it by at least 5 percent.

This assumes the company is able to sustain its contracts while companies go out of business in the coming years. No matter how bad the economy gets, however, people will always need trash disposal services.

Another issue that will affect stock prices is the acquisition of Advanced Disposal. This deal broadens the company’s network, but it also adds nearly $2 billion in debt to its balance sheets.

It already has $13 billion in debt, and that’s going to come into play if the company can’t keep pulling revenues up in the next five years.

Is Waste Management Stock Overvalued? The Bottom Line

Waste Management is the industry leader of a necessary service. It provides garbage collection, storage, recycling, and more.

It’s the industry leader and just bought a big player to help it regain revenues lost from the coronavirus pandemic. Not only is it still going to be in service in the worst of economic conditions, but it already proved itself as a resilient company that can survive anything.

The company even raised its dividend payments while offering discounted services to maintain its contracts. While this hurt short-term profitability, the long-term prospects are positive. This is a great company to add to an investment portfolio.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.