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

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.

However, this hasn’t convinced the bears who believe that the company takes a slow start in acquisition activity and hence benefits from R360 will not come as early as anticipated by the market. Also, $8 million-$10 million write down related to corporate relocation is expected in Q2 or Q3. Moreover, recycling is still expected to contract in Q2.

I have talked about one company that missed earnings and another that topped earnings. However, Republic Services, Inc. (NYSE:RSG)‘ case was a bit different, as the company’s revenue and margins came in-line. The market was happy to see the company’s strong volumes and pricing. Also, the company was able to achieve 90 bps of reduction in SG&A expenses. The company’s buyback policy was also superior as compared to other two, as it made stock repurchases worth $76 million in the last quarter.

However, the concerns circle around the company’s future as it hasn’t taken any specific initiative to drive prices higher. The company expects continued headwind from commodity prices. Negative charges related to the Central States Pension fund’s potential insolvency also pose as another threat to the stock price in future.

My Foolish take

Waste Connections, Inc. (NYSE:WCN) seem to be the brightest of the lot given its growing E&P business. Even Waste Management, Inc. (NYSE:WM) is viewed as a solid candidate given its restructuring program. However, Republic Services, Inc. (NYSE:RSG) seems to be a weak story given its under preparation for the future.

The article The Good and the Bad of the Waste Management Industry originally appeared on Fool.com and is written by Zain Abbas.

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