Waste Management, Inc. (WM): Why Is This a Stable Alternative Energy Play?

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Waste Management, Inc. (NYSE:WM) is a provider of disposal, collection and recycling services in North America. Most investors are likely familiar with the company’s green bins and trash-collection services. However, investors may be less aware of the significant recycling and energy recovery businesses the company is involved with. The company has reported that it can produce over 550 megawatts of electricity, enough to power more than 440,000 homes, from its landfill natural-gas recovery program. This offsets the burning of over 2.2 million tons of coal per year.

Waste Management, Inc.

Waste Management, Inc. (NYSE:WM) produces more renewable energy in the United States than the entire solar industry, in combination with its waste-to-energy program. Thus, Waste Management may arguably be one of the most green companies in the market, and provides more stable and predictable performance than the volatile solar sector.

Waste Management, Inc. (NYSE:WM) is committed to expanding its recycling capabilities. The company acquired Greenstar, one of the country’s largest private recyclers, in January. Greenstar managed approximately 1.5 million tons of recycled material, providing Waste Management with an overall capacity to manage 15 million tons of recycled material annually. Recycling is an important aspect of the company’s business.

Waste Management, Inc. (NYSE:WM) has a market cap of $18.5 billion, and a P/E ratio of 22.7. First quarter 2013 revenue was slightly more than $3.3 billion versus $3.3 billion for the prior year quarter, representing an increase of 1.2%. Net income was $0.36 per diluted share, versus $0.37 per diluted share for the prior year quarter. Earnings were hurt by a drop in recycling commodity prices of around 12%, along with an increase in operating expenses of $43 million. Waste Management's guidance is that 2013 adjusted earnings will increase between 4% and 6%. The company’s net income for the fiscal year 2012 was $13.6 billion.

Recent valuation

Overall, the stock has performed well and is up 19.8% year-to-date. The stock has a fairly low beta of 0.7, indicating that it trades with less volatility than the overall market. The company has an attractive dividend yield of 3.7%, and a dividend has been paid every quarter since at least 2009. Waste Management has a short float of 3.9% with 17.8 million shares being shorted as of the end of May.

Others in alternative energy

Waste Management, Inc. (NYSE:WM)’s main competitor is Republic Services, Inc. (NYSE:RSG). Republic takes away non-dangerous waste from houses and businesses, much like Waste Management. Its operating margins are quite similar, in the mid-teens, but Waste Management is superior at reinvesting capital with a significantly higher ROE at 13%.

Republic Services, Inc. (NYSE:RSG) has a market cap of $12.3 billion, along with net income of $5.5 billion for 2012. The company has a P/E ratio of 22.5, comparable to Waste Management, Inc. (NYSE:WM), and a lower dividend yield of 2.7%. Republic’s share price has performed well in the last year, rising 37.2%. The stock is currently trading at around $34.06. It has a slightly higher beta of 0.8 and low monthly volatility of 1.6%.

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