This Story Will Not Affect Waste Management’s Stock

With shares of Waste Management (NYSE:WM) trading at around $36.46, is WM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Wall Street is an interesting and entertaining arena. There are hundreds of stories published every day, and many of them will hold your interest. In some cases, you read a story that might excite you, even though you know in the back of your mind that the odds of whatever being reported coming to fruition are slim.

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Yesterday, Waste Management’s volume was approximately 13.8 million shares compared to an average volume of approximately 3.2 million shares. Credit Suisse Group stated that investors would benefit if Waste Management was converted to a REIT. Apparently, tax lawyers and accountants deemed that landfills can qualify as REITs. The stock moved up on this news, but not long after, Waste Management stated that the company has no interest in becoming a REIT. The benefit of a REIT is that 90 percent of all taxable income must be distributed to shareholders, but it doesn’t look like there will be any such luck here. Therefore, we must take a look at the basics instead.

Earnings are expected to improve, but margins have decreased. Operating cash flow is respectable at $2.45 billion. Let’s cover some more important numbers for Waste Management…

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio and balance sheet are weak. This is okay for now, but it could lead to a big hit in the stock price if the market turns south. We will eventually find ourselves in an environment where investors will steer clear of debt.

Debt-To-Equity

Cash

Long-Term Debt

WM

1.51

$398.00 Million

$9.99 Billion

CWST

13.90

$25.56 Million

$487.49 Million

RSG

0.92

$74.00 Million

$7.06 Billion

 

T = Technicals on the Stock Chart Still Qualify As Strong

Like almost every other stock across the broader market, Waste Management has performed well over the past three years. The question now isn’t whether or not a stock has performed well over that time frame, but if it’s capable of handling a significant market correction. That isn’t likely to be the case for Waste Management based on past results in those types of environments.

If you are interested in recent results, then Waste Management has outperformed Casella Waste Systems Inc. (NASDAQ:CWST) while slightly underperforming Republic Services (NYSE:RSG). However, Waste Management yields 4 percent where Republic Services only yields 3 percent. Casella Waste Systems doesn’t offer any yield.

1 Month

Year-To-Date

1 Year

3 Year

WM

9.00%

8.09%

9.33%

28.05%

CWST

6.53%

2.40%

-34.81%

-0.55%

RSG

9.51%

8.32%

13.37%

28.90%

 

At $36.46, Waste Management is currently trading above all its averages.  

50-Day SMA

33.69

100-Day SMA

33.19

200-Day SMA

33.43

 

E = Earnings Have Been Steady  

Earnings have been steady yet unimpressive on an annual basis. 2011 revenue exceeded 2007 revenue level, which is a good sign. Annual revenue has been improving consistently since 2009.

2007

2008

2009

2010

2011

Revenue ($)in billions

13.31

13.39

11.79

12.52

13.38

Diluted EPS ($)

2.23

2.19

2.01

1.98

2.04

 

When we look at the last quarter on a year-over-year basis, we see moderate decreases in earnings and revenue.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

3.52

3.41

3.30

3.46

3.46

Diluted EPS ($)

0.58

0.57

0.37

0.45

0.46

 

T = Trends Support the Industry

There is a misconception that waste management (the industry, not the company) is recession proof. But if you look at any one of these companies during the height of the financial crisis, or during the debt ceiling debate in the summer of 2011, you will see that these stocks aren’t resilient. For now, trends support the industry, but be wary if there is a trend change throughout the broader market.

Conclusion

Waste Management is a solid and profitable company, but it’s an average stock. The number-one reason for owning the stock is the 4-percent yield. However, you’re not going to find much growth. The valuation is fair with a Forward P/E of 15.88.  

Waste Management is rated a neutral WAIT AND SEE.

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