Neutral on Waste Management

Waste Management, Inc. (WM - Analyst Report) is the largest provider of comprehensive waste management services in North America. The company continues to drive profits by focusing on its pricing programs and cost reductions. Its leading market position enables it to hold onto its pricing power.

The company is focused on controlling costs to maintain strong margins. The restructuring program announced in the first quarter of 2009 is expected to generate annualized savings of over $120 million. In addition, the company has been successful in adjusting its variable costs to match with the declining volumes.

Moreover, the company is expanding its service offerings and strengthening its market presence through acquisitions. The company spent $127 million on acquisitions in the first three quarters of 2009. Further, in the fourth quarter, the company announced the acquisition of Metro Waste Disposal, a solid waste services company that will strengthen Waste Management’s presence in Northern Ohio.

Waste Management’s ability to generate strong cash flows enables it to invest in growth opportunities. The company generated free cash flow of $839 million in the first nine months of 2009 and estimates $1.3 billion for the full year. Apart from acquisitions, the company uses its cash flow to pay dividends and repurchase shares.

Despite strong fundamentals, we have a Neutral rating on the stock due to expectations of lower volumes in the near-term. Though the company said that the volumes are stabilizing, we still see weakness in the market. Given the current economic conditions, we believe it will be more than a couple of quarters before the company sees a substantial improvement in its volumes.

Read the full analyst report on WM