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Waste Management Rides on Business Moves, Debt Woes Remain

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Waste Management, Inc. (WM - Free Report) stock has rallied 20.3% in the past year, outperforming 15% rise of the industry it belongs to.

 

Waste Management reported mixed second-quarter 2018 results, with earnings matching the Zacks Consensus Estimate but revenues missing the same. Adjusted earnings per share of $1.01 came in line with the consensus mark and increased 24.7% year over year. Total revenues of $3.74 billion missed the consensus mark by $35 million but improved 1.7% year over year.

In the past 60 days, the Zacks Consensus Estimate for third-quarter earnings has been revised 1.8% upward while the same for full-year 2018 increased 1.5%. The company has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in three of the previous four quarters, delivering an average positive earnings surprise of 3.9%.

What’s Driving Waste Management?

Waste Management’s traditional solid waste business has been doing well, driven by strong yield and volume growth in the collection and disposal business. In the second quarter of 2018, traditional solid waste internal revenue growth from volume was 2.3%. Operating EBITDA from the business increased 6.9%. The company spent $21 million on acquisitions of traditional solid waste businesses during the quarter. In the first half of 2018, Waste Management completed the purchase of 12 solid waste businesses.

Backed by the impressive performance of traditional solid waste business and lower-than- expected tax rate in the second quarter of 2018, Waste Management raised its adjusted earnings per share guidance for 2018. The company now expects adjusted earnings in the range of $4.05-$4.10 per share compared with $3.97-$4.05 expected earlier.

We believe implementation of cost-management initiatives has helped Waste Management achieve EBITDA growth and reduction in expenses. In the second quarter of 2018, adjusted operating EBITDA improved 3.1% year over year. Total operating expenses as a percentage of revenue declined to 61.9% from 62.3% in the year-ago quarter. For 2018, the company expects adjusted operating EBITDA in the range of $4.20 to $4.25 billion and free cash flow in the range of $1.95 to $2.05 billion.

Further, the company has been consistently rewarding its shareholders. It has allocated more than 90% of its 2018 free cash flow for rewarding its shareholders through dividend payments and share repurchases in the first half of 2018. 

Waste Management paid $406 million in dividend and repurchased shares worth $550 million in the first half of 2018. In 2017, it paid $750 million in dividend and repurchased shares worth $750 million. In 2016, the company returned $726 million through dividend payment and $725 million through share buyback. Such moves indicate the company’s commitment to create value for shareholders and underline its confidence in its business.

Risks

Waste Management’s balance sheet is highly leveraged. As of Jun 30, 2018, long-term debt was $8.96 billion while cash and cash equivalents were $47 million. Such a cash position implies that the company needs to generate an adequate amount of operating cash flow to pay its debt. Moreover, a high debt may limit its future expansion and worsen its risk profile.

Stringent government regulations are likely to weigh on margins as compliance with such regulations increases operating costs for the company. Decline in average recycling commodity prices and recycling volumes also remain headwinds. The company’s recycling line of business declined $85 million year over year in the second quarter of 2018.

Zacks Rank & Stocks to Consider

Currently, Waste Management is a Zacks Rank #3 (Hold) stock.

Some better-ranked stocks in the broader Business Services sector are CRA International (CRAI - Free Report) , FTI Consulting (FCN - Free Report) and NV5 Global (NVEE - Free Report) . While CRA International and FTI Consulting sport a Zacks Rank #1 (Strong Buy), NV5 Global carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

CRA International, FTI Consulting and NV5 Global have delivered an average four-quarter positive earnings surprise of 38.6%, 58.3% and 12.7%, respectively.

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