stock is the leader of the waste management industry with a stock market
capitalization of $47 billion. Up to 2012 the stock didn’t look like anything
spectacular but since then it has really boomed.
What is the
difference between Waste Management and the other waste management stocks we
discussed up till now?
Well, scale and
Waste management managed to increase margins thanks to its integrated business and moat, as you can’t build new competitive landfills. Not in my back yard (NIMBY) might be something familiar to you😊.
As the business
numbers improved, so di Waste Management’s stock price to earnings ratio
improve. From an average PE ratio in the low teens, the valuation expanded to
the current 27.31 which is a huge valuation for a company that hasn’t been
really growing much.
So, the company got rerated by the market but I still see risks, especially as the company is dependent on the economic cycle as 70% of revenue comes from industrial and commercial clients.
network of landfills and short haul routes that gives it a competitive
advantage is what makes the company a great business.
But, when it comes
to future investment returns, given the price to earnings ratio of 28, there
must be significant growth ahead to justify such a high valuation and a
dividend yield of 1.83% seems a bit high. If I compare it to Visa stock, that I recently analysed. Visa has a price to earnings ratio of 33 but is growing at 15%,
compared to WM’s expected growth of 4% in a very positive economic environment.
Given that there
will not be an amazing population growth rate in the US, we can’t expect WM do
grow much. Therefore, I see it as an expensive investment where the stock is
being pushed up by buybacks and increased dividends. In case of a recession you
can easily see this down 50%.
Now, you might
wonder why do I analyse stocks like Waste Management that are clearly
overvalued when you look at the stock price or price to earnings ratio?
Well, finding out what worked in developed markets will give me great insight when I’ll look into emerging markets. If I find a company that can build a moat there, offer similar economies of scale, grow also thanks to population growth and economic development, I could be looking at a big winner, similarly to what was the case with Waste Management over the past decades, up 30 times not including dividends.
It is unlikely that WM stock repeats the performance over the next 3 decades, but I might find a business somewhere else in the world that will do something similar.