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Waste Management, Inc. (WM) & Peers: What To Watch For

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Waste Management, Inc. (NYSE:WM) companies reported mixed quarterly earnings with two of the three companies reporting an earnings beat. Since the release, these stocks have been up more than 5% till date as shown by the graph:

It will be interesting to note what the bears and bulls have to say about these companies:

Waste Management, Inc. (NYSE:WM), the largest waste management company by market cap, reported its earnings on April 24. The company missed the EPS estimate due to higher operating costs (labor, transfer, and disposal). Pricing and volume are two key metrics that analysts watch in an earnings release of a company of this type. For Waste Management, Inc. (NYSE:WM), the pricing proved to be stronger than anticipated but volumes turned out to be weaker than expectations.

The good and the bad

Apart from pricing, the market read it on a bullish note that the company, despite weak volumes, reiterated its guidance of EPS of $2.15-$2.20 for the year. Moreover, the ongoing cost restructuring program is expected to flow to the bottom line and management is expected to focus on the core business. Hence, the Street has been bullish on the company not only because of improving waste fundamentals (ex-volumes), but also the potential for sale/spin off of non-core assets and move to a more efficient tax structure.

However, bears have got their point of view. Apart from weak volumes, recycling prices have also been declining and were down 12% year-over-year for the last quarter. Waste to energy is no longer a growth business and is largely going to move up and down based on where energy prices are. Waste to Energy is expected to be a $0.02-$0.03 headwind in 2013. Moreover, on the capital allocation side, buybacks are expected to be below historical standards and are expected to remain so till non-core assets are sold off.

Other peers

On the other hand, Waste Connections, Inc. (NYSE:WCN) reported an earnings beat on April 24, helped by a stronger than anticipated result by its Exploration& Production (E&P) segment. This segment has been on the move since the acquisition of R360 Environmental Solutions, a leader in E&P business, in October last year.

Credit Suisse considers the company to be the best of the lot for creating shareholder value. The company is expected to take advantage of potential tax efficiencies by seeking out a private letter ruling for solid waste landfills qualifying for MLP status. The cost of getting a private letter ruling is minimal and the IRS is expected to make a decision 6-9 months post filing.

Apart from a growing E&P business and being a shareholder friendly company, it also has a strong balance sheet with $100 million worth of free cash flows.

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