Summary
- The management team at Waste Management announced financial results covering the final quarter of the company's 2022 fiscal year.
- The firm missed compared to expectations on both its top and bottom lines, but shares barely budged in response.
- Investors acknowledge the quality of the firm and its attractively-priced stock, and they are forgiving for these reasons.
Even in a normal economic environment, missing when it comes to expectations for revenue or earnings per share in any given quarter can send shares of the company reporting the miss down materially. Given the current economic conditions are highly irregular, you would expect this type of response to be even more severe. But one company that held firm even after reporting a miss on its top line and on its bottom line was Waste Management ( WM ), the industry leader in waste and recycling services. This unexpected stability comes in response to the fact that shares of the company are trading at fundamentally attractive levels and in response to the fact that industry leaders in markets that are known for stability already tend to have investors that are more forgiving than the investors in other firms might be. Although the company did manage to disappoint on both its top and bottom lines, the enterprise does seem to still offer some nice upside moving forward. As such, I've decided to keep it at the 'buy' rating I had it at previously.
Missed, but still largely positive, results
In the middle of December of last year, I wrote an article wherein I discussed whether or not it made sense for investors to seriously consider Waste Management as a valid prospect. At that time, I acknowledged the company as an industry leader that had done well to grow both its revenue and cash flows over the prior few years. The continued investments in growth by management were encouraging, but shares of the company weren't exactly cheap. To be fair, they weren't pricey either. In general, I prefer companies that are trading on the cheap. But I am willing to pay more for an industry leader with robust results. That ultimately tipped the scales in favor of a 'buy' rating for the firm, a rating that reflected my belief that shares should outperform the broader market for the foreseeable future. So far, the company has not exactly delivered on that. While the S&P 500 is up 4.6%, shares of Waste Management have seen downside of 8.3%.
Surprisingly, really none of this return disparity can be chalked up to the financial data management reported on February 1st. After all, shares of the company declined by only 0.2% in response to the news. This is not to say, however, that the data provided by management was great. Consider, for starters, the revenue generated by the business. Sales came in at $4.94 billion. While this represents a 5.5% increase over the $4.68 billion generated one year earlier, it did miss analysts' expectations by roughly $40 million. Part of the weakness seems to stem from the fact that volumes transported by the company decreased year over year to the tune of 0.7%. Having said that, the company did benefit from price and fee increases, reporting a 'core price' of 8.1% compared to the 5.1% reported one year earlier.
On the bottom line, the company also missed expectations. Actual earnings per share for the company came in at $1.21. This was also an improvement over what the company experienced one year earlier of $1.20. On an adjusted basis, the company generated a profit of $1.30. That stacked up nicely against the $1.26 in adjusted earnings reported for the final quarter of 2021. Even so, this adjusted figure missed analysts' expectations by $0.12 per share. Overall net profit for the company came in at $499 million. This was down from the $506 million reported in the final quarter of 2021. Despite revenue increasing for the company, margins came under pressure thanks to inflationary issues, particularly related to higher fuel prices. Other profitability metrics for the company, however, were positive. Operating cash flow, for instance, rose from $991 million to $1.05 billion. Meanwhile, EBITDA increased from $1.25 billion to $1.36 billion.
For 2022 in its entirety, the picture for the company was positive. Sales rose year over year, climbing from $17.31 billion to $19.70 billion. That represents an increase of 9.9%, much of which is due to the aforementioned price increases the company enjoyed. In this case, net income actually did increase for the company, jumping from $1.82 billion to $2.24 billion. Operating cash flow rose from $4.34 billion to $4.54 billion, while EBITDA for the company expanded from $5.03 billion to $5.51 billion. End response to these robust results, management also bought back $1.50 billion worth of stock. This serves as a vote of confidence by the company in itself. When it comes to the 2023 fiscal year, management has been kind enough to offer some guidance. For starters, EBITDA is forecasted to come in between $5.825 billion and $5.975 billion. At the midpoint, this would translate to $5.90 billion. Operating cash flow should be between $4.60 billion and $4.725 billion, with a midpoint reading of $4.66 billion. No guidance was given when it came to earnings, but if they were to increase at the same rate that operating cash flow is expected to, then we would anticipate net income of $2.30 billion for the year. It's also worth pointing out that management expects free cash flow net of only maintenance capital expenditures, what I typically call 'true free cash flow', to be between $2.60 billion and $2.70 billion.
Based on the data available, Waste Management seems to be trading at a forward price-to-earnings multiple of 27.6. The forward price to adjusted operating cash flow multiple is considerably lower at 13.6, while the EV to EBITDA multiple should be 13.2. In the chart above, you can see pricing based on data from 2022 and 2021 as well. Shares aren't the cheapest, but they are far from expensive. As part of my analysis, I also compared the company to three similar firms. On a price-to-earnings basis, only two of the companies had positive results, with multiples of 27.2 and 42.6, respectively. In this case, Waste Management is only marginally more expensive than the cheaper of the two. Using the price to operating cash flow approach, the range for the three companies was between 13.1 and 17.9. One of the three firms was cheaper than our target. And finally, using the EV to EBITDA approach, the range was between 12.6 and 19.4. In this case, one of the three companies was cheaper than our prospect.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Waste Management | 28.3 | 14.0 | 14.2 |
Republic Services ( RSG ) | 27.2 | 13.1 | 14.6 |
Waste Connections ( WCN ) | 42.6 | 17.9 | 19.4 |
GFL Environmental ( GFL ) | N/A | 15.0 | 12.6 |
Takeaway
Fundamentally speaking, Waste Management is doing really well for itself. Although management missed expectations for the final quarter, the amount that they missed by was not all that significant. On top of that, investors know this firm is being a bastion of stability and one that should continue to expand in almost any environment for the foreseeable future. Given these factors, combined with how shares are priced relative to cash flow, I would say that some additional upside is warranted. Because of that, I have decided to keep the soft 'buy' rating I assigned the company previously.
For further details see:
Waste Management Q4 2022 Earnings Release: Still Quality, Still Attractive