Is waste management inventory a purchase?
The largest publicly traded garbage collector in the United States, Waste Management (NYSE: WM), worked well throughout the pandemic. Its revenues are spread across various public and private industries, so its numbers hold up better than other industrialists. For example, its commercial and industrial segments have shrunk, but the residential and recycling sector is doing well as people consume more goods in their homes.
Waste management emerges relatively unscathed from the pandemic. Let’s analyze its performance, cost reduction initiatives, and dividend to determine if the business is a good buy now.
Like most industrial actions, Waste Management struggled in the second quarter of 2020. Quarter-over-quarter revenue was down 10% and consolidated net income was down 20%. The company estimated second-half revenue to be 3.5% to 5.5% lower than in the second half of 2019, with most of the damage occurring in the third quarter. But third-quarter revenue fell only 2.7%, and the company’s operating results EBITDA, a measure of profit, was similar to its record in the third quarter of last year. In fact, Waste Management’s third quarter operating EBITDA margin was the highest in its history, and it now expects to end the year with an EBITDA margin of 28% to 28.5%. . This essentially signals to investors that Waste Management is converting more income into profit, an encouraging sign given that it has reached this milestone during a difficult time.
Most people associate waste management with the collection and recycling of residential waste, but it is actually the company’s commercial and industrial collection departments that contribute 70% of its collection revenue and almost half of it. of total income. The pandemic has prompted Waste Management to suspend a considerable portion of its trade volume. But now, 70% of the once-suspended trade volume is back in service. In summary, it looks like Waste Management has recovered from its pandemic lows and is on track to have one of its most profitable years on record.
With 2020 performance just below last year’s numbers, it will be interesting to see if Waste Management can maintain this level of profitability next year. Like most businesses, Waste Management has refined itself and is running a tighter ship than usual. But the management has a balance sheet going through tough times and wants to keep some of its cost-cutting initiatives even after the pandemic is over.
On Waste Management’s third quarter conference call, CEO Jim Fish said the company “learned this year that we can operate our business permanently with a lower cost structure.” He also mentioned that the company will be committed to maintaining the efficiency and cost savings it implemented during the pandemic, even after growth returns.
The prospect of sustainably improved profitability is great news for long-term investors. Waste Management is not a fast growing company, but it is a stable and reliable industry leader that benefits from one of the safest tailwinds – a growing population. Higher margins will help Waste Management convert more revenue into profit, as it naturally grows with the economy. Investors should follow Waste Management’s profitability over the next few quarters to see if it emerges on the other side of the pandemic as a better business.
Free cash flow treasures
Reduced spending helps Waste Management generate some of its benefits free movement of capital (FCF) never. FCF is the amount of operating cash flow remaining after capital expenditure is recognized. Waste Management generates record FCF in part because it spends so little. Its FCF was around $ 1.4 billion for the nine months ended September 30. About half of this amount was distributed to shareholders as dividends, while the rest can be used to pay down debt, grow the business, acquire competitors like Advanced disposal services, or increase the dividend in the future.
The growth of the FCF goes hand in hand with increases in dividends. 2020 marked Waste Management’s 15th consecutive annual dividend increase. Throughout this period, the company has consistently generated FCFs above its dividend, which has helped it become the market leader it is today.
Waste Management earned 45% more FCF in the third quarter of this year compared to the same period last year. It currently generates three times the FCF it needs to pay its dividend. Even if it slows down from its all-time high, the business could easily become a Dividend Aristocrat in 10 years.
A solid buy
Waste Management is well positioned to end a successful year. With 1.9% dividend yield and effective cost savings, Waste Management appears to be a solid industrial inventory to recover now. Investors should be sure to track company spending and the FCF to see if the two measures can continue to go in opposite directions. It would also be interesting to monitor the business and industrial revenues of the company to see if the improvements can translate into even more profits.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.