Waste Management, Inc. (NYSE:WM) and Waste Connections (NYSE:WCN) are two of the biggest garbage and environmental services companies in the United States. As the pandemic lockdowns swept across the country, the need for trash services hasn’t stopped.
However, shifting consumer lifestyles mean people are generating more trash at home, while leaving less in commercial and municipal areas. This caused the waste industry to adjust and experience a slow crawl up from its coronavirus crash price.
Investing in the industry may be a good idea, but which is the better investment between Waste Management vs Waste Connections stock?
Waste collection tends to outperform the greater market in times of recession, and we’re likely heading for a recession in the early 2020s.
Both players took financial hits as its corporate and government clientele reduced spending. This may only be a temporary situation, but it can cause some problems for those not paying attention.
Let’s dive into the heap to find out if these companies are trash or treasure, starting with Waste Management.
Is Waste Management Stock a Buy?
Waste Management’s stock price dropped to a low of $85.34 during the coronavirus pandemic. It since recovered and climbed over the $100 range, trading firmly around $110 leading into its Q3 2020 earnings report.
The company still pays an annual dividend of $2.18 after raising its quarterly payout amid the pandemic.
Its second-quarter revenues dropped to $3.56 billion compared to $3.95 billion in the same quarter of the prior year. Still, it earned $15.103 billion over the past 12 months, making some investors bullish on its growth potential, even though it owns more of the market than anyone other than municipal services.
Its third quarter earnings released November 3 show the company is bouncing back from the pandemic as people go back outside and commercial and municipal orders come back in.
The company is the largest player in the industry, and its market cap under $50 billion could represent a value for bullish investors who believe in its resiliency during economic turbulence.
It’s also one of few companies that provided solid guidance to investors for the fiscal year 2020, as the COVID-19 outbreak changed forecasts unfavorably for most.
Analysts including JPMorgan Chase and BMO Capital Markets believe the company is largely underweight and poised for gains heading into 2021.
The company’s pending $1.8 billion purchase of Advanced Disposal expands its foothold even further. However, some believe it is unwise to invest in the top dog and instead prefer the potential growth of one of its smaller competitors.
Should You Invest in Waste Connections?
While Waste Management dominates the U.S., it faces stiff competition from Waste Connections in Canada. The company is the largest weight in the Wells Fargo Asset Management Discovery Fund (WFDAX), whose growth managers added it back in June 2016 after it merged with rival Progressive Waste Solutions.
This leaves the company with debt of $4.83 billion at the end of the first half of 2020. This is up substantially from the $4.14 billion it carried at this same point in 2019, and its $790.6 million in cash is barely more than its increased debt load.
On top of this, the company still has $1.04 billion in liabilities due by summer 2021, with another $6.06 billion rolling in after that. Including its $608.8 million in receivables coming in the next 12 months, its liabilities outweigh its cash assets by $5.70 billion.
The Waste Connections market cap just over $25 billion means it has the ability (and need) to refinance its net debt, which is nearly two and a half times earnings before interest and tax (EBITDA).
Its positive cash flow and growth means it can easily handle the debt load, but it’s something potential investors should consider heading into its next earnings report.
In fact, let’s discuss the risks of both of these trash stocks ending up in the dump.
Risks Of Waste Management Stock
Waste Management’s stock price has a P/E ratio of 30.02, which is much lower than the average of 70.27 across the Environmental & Waste Services sector in 2020.
This indicates that the stock is low compared to earnings in the context of the rest of its competition and means that it could be a safe bet.
However, it’s not all smooth sailing ahead, as the company took steps to cut and suspend fees to keep its long-term B2B contracts in place through the pandemic.
It can’t be understated how much the coronavirus affected the waste disposal industry – as major events like summer festivals, professional sports, and business conferences shut down, people stopped trashing the planet.
The lockdown notably paused pollution, which left this necessary garbage collection, storage, and processing industry struggling for profits.
Waste Connections Debt Appears Under Control
Waste Connections is affected by the same problems Waste Management has, which includes purse strings tightening in the aftereffects of the COVID-19 pandemic.
The company also has a massive debt load, as explained above. Debt is always a consideration for investors, because they often find themselves shortchanged in a bankruptcy if a company carries a large load of debt.
However, bankruptcy is unlikely in this industry, as the acquisitions both of these companies proved one man’s trash is another’s treasure. This makes Canada’s garbage company a relatively low-risk bet.
Waste Connections vs Waste Management Stock: The Bottom Line
Waste Management and Waste Connections had a turbulent year and certainly weren’t immune to the effects of the coronavirus. As people around the globe shuttered indoors, pollution and public trash dropped drastically.
Unfortunately, this paradise is already being replaced with the old way, and we’re going to need these essential workers more than ever before.
Most investors are bullish on this industry as a long-term investment. Growth may be slow in the early 2020s, but these trash stocks already proved during the pandemic that they can outperform the general market.
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