2023-03-06 10:26:20 ET
Summary
- Waste Management, Inc. has simply focused on solid execution, that is, increasing prices, managing volumes, and pursuing bolt-on M&A.
- The company has smartly focused on recycling and environmental activities as well.
- With Waste Management stock being awarded premium valuations, with earnings yields trailing risk-free rates, I continue to lean cautious.
In the spring of 2019, I concluded that shares of Waste Management, Inc. (WM) were advancing on a near $5 billion Advanced Disposal Services deal. Despite the potential for synergies and a great M&A track record by the firm, Waste Management shares looked pretty fully valued to me, with shares trading around the $100 mark at the time.
A Recap
A $4.9 billion deal for Advanced Disposal announced early in 2019 added quite some scale to the operations of Waste Management, adding more than 6,000 workers, 3 million customers, over $1.5 billion in revenues, and over $400 million in EBITDA. The deal was set to add 94 collection operations, 73 transfer stations, 41 landfills, and other activities, with cost and capital spending synergies pegged at $100 million per annum.
The deal was an interesting acquisition for Waste Management, being larger than a bolt-on deal, but not a game changer, either. The transaction was set to grow revenues by around 10%, after Waste Management posted revenues of $14.9 billion and EBITDA of $4.2 billion.
The 428 million shares traded around the $100 mark, for a $43 billion equity valuation, or $53 billion enterprise valuation, equal to 3.6 times sales and 12.6 times EBITDA. Net debt would jump to $15 billion following the deal, yet leverage was pegged at 3.2 times as the market voted in favor of the deal with its feet, that is, shares rose 2-3% on the back of the announcement of the transaction.
That did not mean that shares were cheap, as adjusted earnings power of $4.20 per share translated into a 25 times earnings multiple and a mere 4% earnings yield, as the market liked the track record of the firm as well as emerging recycling and environmental initiatives. That said, a 25 times earnings multiple and 3 times leverage ratio felt a bit too rich to get involved
Still Going Strong
Since spring of 2019, Waste Management, Inc. shares have generally done quite alright. Fast forwarding nearly four years in time, shares now trade at $150, after trading at a 52-week high around the $175 mark, translating into 50% returns over a four-year time period, that is, excluding a current 1.9% dividend yield.
With the pro forma operations set to generate $16.4 billion in revenues, we see that the business has seen modest growth through 2021, as Waste Management posted $17.9 billion in sales for that year (as released early in 2022). Adjusted EBITDA rose in line to $5.0 billion, with adjusted earnings of $2.0 billion working down to earnings of $4.84 per share. Net debt had already come down to $13.3 billion, for a 2.7 times leverage ratio, marking modest progress on that front.
The company guided for a solid 6% increase in 2022 sales on the back of pricing, modest volumes increases, as well as higher market prices for recycled commodities and higher value of renewable fuel standard credits, with circularity and recycling becoming more important strategic topics. This should allow the company to expand EBITDA to $5.375 billion.
Following strong results in the first half of the year, the company hiked the sales guidance, with revenues now seen up 10% as the midpoint of the EBITDA guidance was increased to $5.5 billion. Reflective of the strong underlying momentum, the board hiked the dividend by nearly 8%, now paying out a $2.80 per share as another $1.5 billion buyback program was announced as well.
In January, it was apparent that the company lived up to its promises, with full year sales up 10% to $19.7 billion with EBITDA posted at $5.51 billion. Adjusted earnings came in at $2.32 billion, equal to $5.59 per share.
Net debt has ticked up to $14.6 billion again, but given the improvement in EBITDA, relative leverage ratios are stable at 2.7 times. This is reflective of more pay-outs to investors, generic capital spending and some-tuck-on acquisitions. With revenues seen around 5% and EBITDA set to increase to $5.9 billion, the outlook for 2023 arguably is good, placing the company on a clear trajectory for earnings of $6 per share. This is despite some headwinds, as lower EBITDA is seen in the renewable business and the recycling business (to the combined tune of up to $100 million) after a strong performance on this end in 2022.
And Now?
The truth is that, similar to 2019, Waste Management, Inc. shares still trade at 25 times (forward) earnings as leverage comes in just below 3 times. The big difference is that the current 4% earnings yield trails that of risk-free rates, yet Waste Management has a great long-term growth track record, with focus on recycling and circularity of materials usage being major advantages as well for the long-term positioning of the business.
While I like the defensive nature of the Waste Management, Inc. business and the long-term track record, the earnings yield is simply not compelling enough given where interest rates are right now. This leaves me a patient buyer around a 20 times multiple, as Waste Management, Inc. shares need to see a big dip towards $120 before I am looking to get involved.
For further details see:
Waste Management: Like The Smell Of It, Except The Price