We maintain our Neutral recommendation on
Waste Management Inc.
). The quantitative Zacks #3 Rank (short-term Hold rating) for the
company indicates no clear directional pressure on the shares over
the near term.
Waste Management's earnings per share dropped a cent to 38 cents
missing the Zacks Consensus Estimate of 40 cents. Revenues
increased 6% to $3.395 billion from $3.103 billion in the year-ago
quarter. The top line was marginally ahead of the Zacks Consensus
Waste Management's recent acquisition of Oakleaf Global Holdings
will provide North American customers with unprecedented access to
waste and recycling solutions by pairing the largest network of
directly owned hauling, recycling, diversion and disposal assets
with the largest managed third-party network.
The Oakleaf integration is on track and benefits are targeted by
the second half of 2012. Subsequent to the completion of
integration, the company expects to generate a minimum of $80
million in EBITDA on an annualized basis.
2011 marked the ninth consecutive year of a quarterly dividend
hike. The dividend has grown from 1 cent a share in 2003 to $1.42
in 2011. The current dividend yield came in at 4.1%. In 2012, Waste
Management plans to return up to $1.2 billion to its shareholders
through a combination of dividends and share repurchases.
Backed by its strong cash flow, Waste Management is expected to
announce yet another dividend hike this year. The board has also
authorized up to $500 million in share repurchases.
Waste Management's cost-cutting efforts helped the company to
maintain its profits despite weaker volumes. Cost cuts for the year
were attained through better supply chain management. These savings
are expected to accelerate in 2012.
Furthermore, the company will resort to additional cost
reductions such as improvement in delivery of services in the field
through more efficient routes, reduced unproductive time, and
better customer support with greater use of onboard computing
technology and reengineering field processes. We believe
cost-saving and efficiency initiatives should continue to benefit
the bottom line in 2012 and thereafter.
Waste Management has recorded declines in volumes in the recent
past due to the overall macro weakness. However, in the first
quarter of fiscal 2012, volumes grew 1.3%, the first positive
reading since 2006. Growth in the landfill and industrial
businesses exhibited the best results seen since 2006.
Municipal Solid Waste volumes were positive for the second
consecutive quarter and special waste volumes continued its stint
of strong growth seen over the last four quarters. Although volumes
in the commercial and residential lines of business remain
negative, there has been a sequential improvement in the rate of
decline in those volumes. Based on the improving trend, we assume
slightly positive volume growth for 2012.
Waste Management's recycling operations process for sale certain
recyclable materials, including fibers, aluminum and glass, all of
which are subject to significant market price fluctuations. In the
first quarter of fiscal 2012, average recycling commodity prices
were down 20% compared with the prior-year period, negatively
impacting earnings per share by 3 cents.
The company is expected to face commodity price headwinds in the
second and third quarters of 2012 as well, and possibly witness
moderate improvement in the fourth quarter. For 2012, recycling
commodity prices are expected to have a negative year-over-year
impact of approximately 5 cents on its earnings per share.
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 at
market rates by the end of 2012.
The company's exposure to market price volatility has increased
over the last few years as long-term power purchase agreements have
expired. Electricity prices have remained stubbornly low and are
expected to be at low levels in the first half of 2012 as well.
To sum up, we maintain our Neutral recommendation on Waste
Management, with the rewards balancing out the risks. We intend to
hold a more positive stance when Waste Management's cost cutting
and growth initiatives bear fruit.
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
REPUBLIC SVCS (RSG): Free Stock Analysis Report
WASTE MGMT-NEW (WM): Free Stock Analysis Report
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