Is Waste Management, Inc. (WM) A Good Stock to Buy?

Waste Management, Inc. (NYSE:WM), an $18 billion market cap waste management services company, has risen 16% year to date- narrowly outperforming the S&P 500 despite the fact that the stock carries a beta of 0.7 and so would be expected to underperform during a bull market. The company’s revenues increased only 2% last year compared to 2011, and with operating costs increasing at a faster rate Waste Management, Inc. (NYSE:WM) experienced a 15% decrease in net income. Cash flow from operations was also down slightly. The fourth quarter of the year was in line with the general trend for 2012, as sales showed very little increase from their levels a year ago while net income declined at a double-digit rate.

However, investors have been bidding up the stock price (as we discussed earlier) and currently Waste Management, Inc. (NYSE:WM) trades at 22 times trailing earnings. The sell-side does expect some bottom-line growth over the next couple years, but still the forward P/E is 17 which seems rather high for a stable, almost utility like business. So from a value perspective the stock seems, if anything, overvalued. Waste Management does pay a generous dividend yield of 3.8% at current prices, making it a strong contender for an income portfolio; with the fairly low beta as well it could also make for a good defensive stock.

Waste Management logoWe track 13F filings from hedge funds and other notable investors as part of our work researching investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can also use our database to see who liked Waste Management, Inc. (NYSE:WM) as of the end of December. The largest shareholder out of the filers we track was the Bill and Melinda Gates Foundation Trust, which owned nearly 19 million shares; the trust owns a significant percentage stake of fellow waste management services company Republic Services, Inc. (NYSE:RSG). See more of the trust’s stock picks. Value investor Barry Rosenstein’s JANA Partners initiated a position of 1.3 million shares in the fourth quarter of 2012 (find JANA’s favorite stocks).

Waste Management’s peers, other than Republic Services, include Waste Connections, Inc. (NYSE:WCN), Progressive Waste Solutions Ltd (USA) (NYSE:BIN), and Covanta Holding Corporation (NYSE:CVA). The two highest dividend yields belong to Republic Services and Covanta, though each pays a lower yield than Waste Management does. Republic pays 2.9% to its shareholders, and its stock price also has a weak statistical relationship to the market with a beta of 0.6.

However it doesn’t seem that competitive compared to Waste Management and its own business has been struggling recently. Covanta, which operates energy-from-waste facilities, is actually valued at over 30 times analyst consensus for 2014; with its dividend yield also above 3%, but lower than what an investor would get as Waste Management, Inc. (NYSE:WM), we would avoid it.

Waste Connections and Progressive Waste Solutions are also priced for growth. In each case revenue was doing quite nicely in the company’s most recent quarter compared to the same period in the previous year; Waste Connections reported an 18% increase in sales, though its earnings actually fell modestly. While that stock has a quite low beta at 0.3, we have little confidence in its valuation and the dividend yield is nothing special. Progressive at least pays investors 2.6%, but this is lower than what we’ve seen at some of its peers. Of course as with these other companies the earnings multiples are high- trailing and forward P/Es of 26 and 18, respectively- and while Progressive has seen some growth on the top line we don’t think it is enough to justify the current valuation.

All five of these stocks post trailing P/E multiples of more than 20, suggesting that the market is expecting high earnings growth from the industry. Recently, however, financial performance has not been that strong and so we’d actually wonder if some of these stocks are good shorts. Some companies do pay good dividend yields, with Waste Management, Inc. (NYSE:WM) the highest among them, and if an income investor is interested in the industry that is probably the first stock to consider.

Disclosure: I own no shares of any stocks mentioned in this article.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!