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Waste Management, Inc. (WM), Republic Services, Inc. (RSG): Dumpster Diving for Investment Ideas

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Living in a country with a waste disposal system that is as effective as America’s is a blessing indeed. In 20 years of taking out the garbage, I’ve noticed that the same name is on practically every dumpster: Waste Management, Inc. (NYSE:WM). Here are some key points from what I was able to learn about Waste Management, Inc. (NYSE:WM).

Waste Management, Inc.

How the money is made

Until the third quarter of 2012 Waste Management, Inc. (NYSE:WM)’s divided its segments on the basis of geographical location. As a result of restructuring, it currently has three reportable segments: solid waste, Wheelabrator, and other. The solid waste segment generates the vast majority of Waste Management, Inc. (NYSE:WM)’s revenues. This segment’s operations pertain to the collection, transfer, recycling, and disposal services that Waste Management, Inc. (NYSE:WM) provides for individuals, businesses and cities.

For Waste Management, Inc. (NYSE:WM), the most profitable part of its solid waste business is collection, but there is more to this business than just collecting trash. After the garbage is collected it needs to be transferred, and then disposed of in a responsible manner. The solid waste segment is involved in all of these activities.

Waste Management’s Wheelabrator segment accounts for less than one-tenth of revenue, but some cool things are done in this segment. This segment creates energy by burning trash! Wheelabrator’s waste-to-energy facilities turn waste into energy by burning it in specially engineered boilers. The resulting heat energy is then converted into high pressure steam which can be sold directly or converted into electricity.

Revenues for Waste Management’s “other” segment have been growing at an astounding rate, nearly quintupling in three years. Services provided by this segment include cleanup for oil drilling and coal mining operations, and brokerage of recyclable materials for third parties. This segment is growing like a weed, I’d keep my eye on it.

Trash titans

In its latest 10-K, Waste Management described the industry in America as consisting of two large national waste management companies, and an assortment of regional companies of varying sizes and degrees of financial strength. The other dominant player in America’s waste management industry goes by the name of Republic Services, Inc. (NYSE:RSG). Together these two companies handle the collection of over half of our nation’s garbage. In 2008 Waste Management twice attempted an acquisition of Republic Services, Inc. (NYSE:RSG), only to be rejected both times. Here is how these two trash titans stack up in terms of operating cash flow:

Waste Management Republic Services
Operating Cash Flow (TTM) $2.397 billion $1.599 billion
TTM OCF As a % of Market Cap 12.23% 13%
OCF Average 2010-2012 $2.346 billion $1.571 billion
OCF Average 2007-2009 $2.459 billion $856.7 million
OCF Average 2004-2006 $2.383 billion $652 million
OCF Average 2001-2003 $2.145 billion $543.1 million

Republic Services, Inc. (NYSE:RSG) appears to have been the new kid on the block in the early 2000s, but since then has done some serious catching up. The rate at which Republic Services, Inc. (NYSE:RSG) grew over the past decade, while spectacular, will be nearly impossible to duplicate. But that’s nothing to worry about–Republic Services, Inc. (NYSE:RSG) still trades at a reasonable level relative to its operating cash flow.

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