Why Is Waste Management Stock Dropping?

Waste Management, Inc. (NYSE:WM) share price ran up to $226 per share in July but the subsequent months have taken a toll on shareholders with the stock plunging below $200 per share, bouncing slightly and then re-testing those levels. What is causing this Bill Gates favorite, a leading North American provider of environmental services, to falter?

First off, if you’re not too familiar with the company, it operates through a host of subsidiaries to offer a wide variety of waste management solutions. With over 22,000 collection and transfer trucks, Waste Management operates the largest fleet in its industry.

In spite of management’s clear goals, the stock has suffered. At the outset of the year, the top brass stated that they are focusing on three priorities: pricing across all business areas, leveraging technology to lower customer service costs, and investing in sustainability initiatives, including recycling and renewable energy.

Yet all those bullish momentum has given way to a downtrending share price, why?

Why Is Waste Management Stock Dropping?

Waste Management stock is dropping after management reported an earnings miss due to expenses coming in 5.4% higher than expected. Revenues fell below consensus estimates as a result, landing at $5.40 billion versus $5.43 billion expected.

In spite of the shortfall, the past three years has been pretty solid with Waste Management’s revenues climbing by 9.9% annually. 

Net income and EPS also rose by 17.8% and 18.6% respectively, while EBITDA stair-stepped higher by 10.9% annually during the same period.

Initially, analysts had forecast that Waste Management’s revenue will grow by 6% year-over-year to reach $5.43 billion while EPS is expected to climb by 20.9% and hit $1.82 per share.

It’s no surprise they were optimistic given that, in three of the past four quarters, the company had beaten analysts’ expectations.

Next quarter, analysts calculate Waste Management’s revenues could climb further by 6.2% to reach $5.52 billion and calculated EPS could rise by 19.2% compared to last year, reaching $1.94.

Overall, Waste Management’s stock has performed well, increasing by more than 42% in the past nine months and over 20% in the last six months. Plus, the stock rose strongly by 6% just last month, showing investor optimism about the company’s prospects.

Analysts have set the target price at $224.11, suggesting a modest 0.59% increase from its current price.

1 Billion Reasons To Buy Waste Management

There is a reason that Bill Gates has such a large position in Waste Management and it’s largely because the firm has a remarkably steady track record, even amid the economic uncertainties of recent years.

The stair-stepping climb in revenues that have been evident in recent year are primarily driven by price increases in its collection and disposal business as well as good performance in its recycling operations, even against the backdrop of volatility in recycled commodity prices.

Operating income approaching $1 billion is evidence of the firm’s pricing power and indicative of just how well the management team has kept costs under control and maintained healthy margins. The adjusted operating margin most recently stood at 17.3% despite inflationary pressures from a triumvirate of sources, fuel, labor, and maintenance costs.

Against a wonky economic backdrop, Waste Management’s balance sheet remains fortress-like with a reported $4.2 billion in free cash flows for the trailing twelve months solidifying the liquidity position. It’s the kind of monstrous cash flows that support share buybacks and dividends. Speaking of income opportunities, what does the WM dividend payout these days?

Is Waste Management’s Dividend Worth Buying?

The annualized payout Waste Management makes to shareholders is $3 now, corresponding to a yield of 1.41%.

That doesn’t seem like a high percentage yield perhaps but the 46% payout ratio and 20-year growth streak is why conservative investors flock to it. In a word, Waste Management provides stability.

By the way that payout ratio measures the proportion of earnings paid out as dividends and it shows that management has struck a balance between retaining a significant portion of its earnings for reinvestment in growth initiatives and keeping shareholders pleased with the dividend policy.

Add to these good statistics the fact that the free cash flow yield is around 5.5% and it shows the dividend growth trajectory is unlikely to veer off course in the coming years.

How Profitable Is Waste Management?

Not only is Waste Management profitable but it is improving on the bottom line.

Looking back 3 years, earnings before interest and taxes were $773 million. Fast forward to the most recent quarter and that figure has mushroomed to over $1 billion. Net income is up from $538 million to $680 million over those same 12 quarters. 

A key factor driving improved profitability is the growing gross margin that has risen from 37.7% to 39.1% over that same time period. A near 40% gross margin, for reference, is about the same margin that Amazon posted 12 quarters ago. To be precise, it came in at 43.2%, though admittedly it has now grown also to 50.1% in the most recent quarter.

So what does this all boil down to?

Is Waste Management Stock a Buy?

Waste Management is a strong buy for long-term investors because of its wide moat and stable business model that produces a reliable and ever-growing dividend yield.

It’s no wonder that Bill Gates has held onto it as a core position for so long. After all, the company’s long-term contracts with municipalities and commercial customers provide a stable revenue stream, even during economic downturns.

It’s also got a rising gross margin, strong cash flows, a reasonable payout ratio and ample room to grow its dividend in the future.

If there were a drawback it’s on the valuation front. Trading at a 32.9x price-to-earnings multiple now it’s hard to argue that WM is cheap. Still, when factoring in growth, it’s not overly expensive. The 5-year net income growth projection is estimated at 12.2%, a healthy clip for such a large company.

Sentiment has taken somewhat of a hit recently too with 14 analysts revising their earnings estimates lower for the stock in the upcoming period. For those with an eye on the long-term, it’s hard to argue against dips in WM share price being buying opportunities. Traders, though, may wish for the technical trend to reverse and show signs of an upward trajectory once again before attempting to pick the bottom.

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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.