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Moody’s upgraded the rating for senior unsecured debt of Waste Management, Inc. (WM - Analyst Report), a leading provider of integrated waste management services, by one notch to Baa2. The ratings of the debt of its wholly-owned subsidiary Waste Management Holdings also received a similar upgrade.

The upgrade affects approximately $8.5 billion of the company’s debt. Baa2 is an investment grade rating and indicates the presence of moderate credit risk with some speculative characteristics.

Ratings Rationale

Moody’s expects Waste Management to benefit from improving industry prospects, as it is the largest private provider in the industry. The upgrade also reflects sustained capital discipline at Waste Management, as it restricts capital expenditure and uses free cash flow to fund share repurchases.

The rating agency expects price improvements to drive the company’s organic revenues, which are expected to grow 2–3% as against modest declines in 2011 and 2012. The company’s cost control initiatives along with revenue growth are expected to generate robust operating margins and healthy free cash flow.

Strong liquidity combined with conservative financial leverage augur well for the company.

Outlook

Moody’s rating upgrade is accompanied with a stable outlook as it expects North American solid waste volumes and prices to show modest improvement in 2014 and 2015. The rating agency expects Waste Management to overcome volume weakness by increasing price, thus driving revenues.

Waste Management could win further upgrades if its cost discipline strategies lead to sustained expansion in operating margins, along with lower volatility in profits and cash flow. Persistently low financial leverage and expansion of revenue sources are some of the other considerations for an upgrade.

On the other hand, ratings may get negatively affected if the Waste Management’s financial leverage trends higher or the operating margins go below 15%. Also, the company would be adversely affected by any significant reduction in the industry’s collection and disposal volume or pricing.

Waste Management currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the business services sector worth considering include Avis Budget Group, Inc. (CAR - Analyst Report), Genpact Limited (G - Snapshot Report) and ManpowerGroup Inc. (MAN - Analyst Report), each carrying a Zacks Rank #1 (Strong Buy).

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