We are maintaining our Neutral recommendation on
Waste Management Inc.
) based on concerns regarding lower commodity prices, electricity
prices and a challenging pricing scenario. Waste Management
currently maintains a Zacks #3 Rank (Hold) for the short
Waste Management's third quarter 2012 EPS decreased 3% to 61
cents while revenues dipped 2% to $3.461 billion. Reported EPS
was a penny ahead of the Zacks Consensus Estimate but revenues
fell short of the same.
The bright side of the quarter was the improvement in work-day
adjusted volume for the third quarter in a row, after declining
for 23 consecutive quarters. The last time Waste Management
delivered two straight quarters of volume growth was back in
2005. Volumes were on the decline mainly based on weak economic
environment, pricing, competition and increased focus on waste
reduction and diversion by consumers. Industrial, special waste
and recycling operations saw positive volume growth. Residential
volumes though still lingering in negative territory, have
improved over the last few quarters. Based on the improving
trend, we assume slightly positive volume growth for 2012.
Waste Management's acquisition of Oakleaf Global Holdings will
provide North American customers with unprecedented access to
waste and recycling solutions by combining the largest network of
directly owned hauling, recycling, diversion and disposal assets
with the largest managed third-party network. Post integration,
the acquisition is expected to generate a minimum of $80 million
in EBITDA on an annualized basis.
Waste Management recently announced certain restructuring
actions, including doing away with certain management positions,
consolidating some back-office functions, bringing the overall
headcount down by about 700. The restructuring program is
expected to generate $130 million in annual savings by the
beginning of 2013, which are expected to drive margin improvement
in 2013 & beyond.
On the flipside, average commodity prices have declined since
the fourth quarter of 2011, which has impacted the company's
earnings. Decline in average recycling commodity prices resulted
in a negative impact of 10 cents on the third quarter earnings
per share and a 14 cent per share impact so far in 2012.
Commodity price headwinds are expected to remain in the fourth
quarter as well with a likely negative impact of approximately 4
cents on earnings per share. Waste Management lowered its 2012
EPS guidance range to $2.08 to $2.13 from its prior range of
$2.15 to $2.20 on a lower recycled commodity price
During 2011, approximately 54% of the electricity revenue at
Waste Management's waste-to-energy facilities was subject to
current market rates. The company estimates that nearly 56% of
its electricity revenue at its waste-to-energy facilities will be
realized at market rates by the end of 2012. The company's
exposure to market price volatility or electricity has increased
over the last few years as long-term power purchase agreements
have expired. Electricity prices declined 8% in the first
quarter, 10% in the second quarter and 12% in the third quarter
on a year-over-year basis. Electricity prices are expected to be
at low levels in the fourth quarter as well and to be flat to
slightly down annually in fiscal 2012.
Waste Management's margins have been affected mainly due to
the integration of Oakleaf and higher materials costs. Based on
stabilizing volumes, the company plans to be more aggressive on
pricing in the back half of the year. Overall, the pricing
environment remains challenging and highly competitive due to
aggressive bidding by smaller competitors. We do not expect any
margin improvements until at least 2013.
Waste Management is the largest provider of comprehensive
waste management services in North America. The company provides
collection, transfer, recycling and resource recovery, as well as
disposal services, to nearly 20 million residential, commercial,
industrial and municipal customers. It competes with
Republic Services, Inc.
Casella Waste Systems Inc.
CASELLA WASTE (CWST): Free Stock Analysis
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WASTE MGMT-NEW (WM): Free Stock Analysis
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