Disposing of garbage may not be the most glamorous industry, but it can be a source of steady profits for investors. Waste Management Inc. (NYSE: WM) has been the U.S. leader in this field for many years, and it remains that today.
Back in September 2012, my colleague John Persinos recommended the stock and noted that “new regulations from global organizations designed to boost environmentally friendly technologies are a boon for transnational players” such as WM. If you had purchased the stock then, you would have pocketed a total return of more than 33 percent.
But it’s not too late. The case for investing in Waste Management remains as strong as it was a year ago. Growing revenue from acquired entities around the world, higher capital expenditures and increasing operational efficiencies have enabled the company’s earnings to keep rising.
WM is the world’s largest solid waste collection and disposal company. It also treats and disposes of hazardous and medical waste, as well as operating energy-producing facilities.
The company’s most recent earnings report was solid. Revenues for the third quarter of 2013 were $3.62 billion, compared with $3.46 billion for the same 2012 period. Net incomefor the quarter was $291 million, or $0.62 per share, compared with $214 million, or $0.46 per share, for the third quarter of 2012, more than a 30 percent increase. Income from operations grew $77 million and income from operations margin grew 150 basis points.
CEO David Steiner commented, “Despite continued headwinds confronting our recycling and waste-to-energy businesses, our overall as-adjusted income from operations grew $33 million and the overall income from operations margin grew 20 basis points. The results were even more impressive in our traditional solid waste business, where income from operations grew $71 million and our income from operations margin grew 120 basis points.”
The results have been driven by the company’s continued focus on increasing internal revenue growth from yield and controlling costs. Net cash provided by operating activities increased by $162 million, almost 30 percent, to $736 million in the third quarter from the prior year, and through the first nine months of 2013 was $1.9 billion.
WM had the best quarterly free cash flow that it has seen since the third quarter of 2008. Revenue increased by 4.6 percent, or $160 million, from the prior year, primarily from acquisitions and internal revenue growth.
Operating expenses increased by $96 million from the prior year. The majority of the increase relates to the acquired operations of Greenstar and RCI, increased recycling costs, and the timing of repair and maintenance costs at the company’s waste-to-energy facilities. The company still expects to spend between $1.3 billion and $1.4 billion on capital expenditures in 2014.
Waste Management’s services generate a robust cash flow that it largely devotes to acquisitions, dividends and share buybacks. The company has consistently paid dividends since 1998. In the most recent quarter, the company returned $171 million to shareholders in the form of dividends.
Steiner added, “In the third quarter we maintained our disciplined approach to improving yield, reducing costs, and managing working capital and capital expenditures, which is reflected in our earnings growth and in the improvement in net cash provided by operating activities and free cash flow. As a result, we are on track to achieve our full-year goals.“
Renewable Resources
Waste Management has maintained its dominant position by constantly adapting to changes in the industry, including new environmental regulations and new scientific innovations.
The company has announced that it’s building a facility that will create pipeline-ready natural gas from its Milam Landfill in Fairmont City, Ill. The processed renewable natural gas will be injected into the pipelines of Ameren Illinois for withdrawal at other locations, including some Waste Management facilities. Once there, it will be used to fuel truck fleets and other equipment that run on compressed natural gas, or CNG. Waste Management is calling the plant the Renewable Natural Gas Facility and expects it to begin delivering gas to the pipelines in late summer 2014.
“Ameren Illinois applauds Waste Management for deploying an innovative technology to fuel their fleet,” said Richard J. Mark, president and CEO of Ameren Illinois. “This is a first-of-its-kind collaboration for Ameren Illinois to facilitate the transportation of clean, renewable natural gas through our pipelines to the U.S. gas distribution grid.”
Like wind and solar, landfill gas is a renewable source of energy endorsed by the U.S. Environmental Protection Agency as an alternative to fossil fuels. It’s produced as waste naturally decomposes inside a landfill. Once captured, the gas is filtered and compressed and can be used to fuel an engine or a turbine to generate electricity. At the new Renewable Natural Gas Facility, the landfill gas will be further processed to produce pipeline-quality natural gas.
“This type of project represents an important alternative source of renewable energy that we provide straight from our landfills,” said Paul Pabor, vice president of renewable energy for Waste Management. “While we are well known as a waste and recycling company, we’re also an energy company.”
At the landfill, on-site emissions will be reduced by the Renewable Natural Gas Facility. Since the gas will be treated, rather than burned onsite, Waste Management anticipates about a 60 percent reduction in emissions of carbon monoxide, nitrogen oxides, and particulate matter.
The stock’s price-earning ratio has risen somewhat in the last 12 months and is now around 22. But given the company’s myriad assets, both tangible and intangible, the price still seems quite reasonable.
Tom Scarlett is an investment analyst at Personal Finance and its parent web site Investing Daily.
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