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We maintain our Neutral recommendation on Waste Management Inc. (WM - Analyst Report). The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
Waste Management’s earnings per share dropped a cent to 38 cents missing the Zacks Consensus Estimate of 40 cents. Revenues increased 6% to $3.395 billion from $3.103 billion in the year-ago quarter. The top line was marginally ahead of the Zacks Consensus Estimate
Waste Management’s recent acquisition of Oakleaf Global Holdings will provide North American customers with unprecedented access to waste and recycling solutions by pairing the largest network of directly owned hauling, recycling, diversion and disposal assets with the largest managed third-party network.
The Oakleaf integration is on track and benefits are targeted by the second half of 2012. Subsequent to the completion of integration, the company expects to generate a minimum of $80 million in EBITDA on an annualized basis.
2011 marked the ninth consecutive year of a quarterly dividend hike. The dividend has grown from 1 cent a share in 2003 to $1.42 in 2011. The current dividend yield came in at 4.1%. In 2012, Waste Management plans to return up to $1.2 billion to its shareholders through a combination of dividends and share repurchases.
Backed by its strong cash flow, Waste Management is expected to announce yet another dividend hike this year. The board has also authorized up to $500 million in share repurchases.
Waste Management’s cost-cutting efforts helped the company to maintain its profits despite weaker volumes. Cost cuts for the year were attained through better supply chain management. These savings are expected to accelerate in 2012.
Furthermore, the company will resort to additional cost reductions such as improvement in delivery of services in the field through more efficient routes, reduced unproductive time, and better customer support with greater use of onboard computing technology and reengineering field processes. We believe cost-saving and efficiency initiatives should continue to benefit the bottom line in 2012 and thereafter.
Waste Management has recorded declines in volumes in the recent past due to the overall macro weakness. However, in the first quarter of fiscal 2012, volumes grew 1.3%, the first positive reading since 2006. Growth in the landfill and industrial businesses exhibited the best results seen since 2006.
Municipal Solid Waste volumes were positive for the second consecutive quarter and special waste volumes continued its stint of strong growth seen over the last four quarters. Although volumes in the commercial and residential lines of business remain negative, there has been a sequential improvement in the rate of decline in those volumes. Based on the improving trend, we assume slightly positive volume growth for 2012.
Waste Management’s recycling operations process for sale certain recyclable materials, including fibers, aluminum and glass, all of which are subject to significant market price fluctuations. In the first quarter of fiscal 2012, average recycling commodity prices were down 20% compared with the prior-year period, negatively impacting earnings per share by 3 cents.
The company is expected to face commodity price headwinds in the second and third quarters of 2012 as well, and possibly witness moderate improvement in the fourth quarter. For 2012, recycling commodity prices are expected to have a negative year-over-year impact of approximately 5 cents on its earnings per share.
During 2011, approximately 54% of the electricity revenue at Waste Management’s waste-to-energy facilities was subject to current market rates. The company estimates that nearly 56% of its electricity revenue at its waste-to-energy facilities will be at market rates by the end of 2012.
The company’s exposure to market price volatility has increased over the last few years as long-term power purchase agreements have expired. Electricity prices have remained stubbornly low and are expected to be at low levels in the first half of 2012 as well.
To sum up, we maintain our Neutral recommendation on Waste Management, with the rewards balancing out the risks. We intend to hold a more positive stance when Waste Management’s cost cutting and growth initiatives bear fruit.
Waste Management is the largest provider of comprehensive waste management services in North America. The company provides collection, transfer, recycling and resource recovery, as well as disposal services to nearly 20 million residential, commercial, industrial and municipal customers. It competes with Republic Services, Inc. (RSG - Analyst Report) and Casella Waste Systems Inc. (CWST - Snapshot Report).