Waste Management Is A Cash-Flow Behemoth
Waste Management (NYSE:WM) is, if nothing else, a free-cash-flow behemoth. The company churns out billions in free-cash-flow every year and does a fairly good job of managing it, too. The company is known for growth and returning cash to cash to shareholders and the pandemic has done very little to alter that narrative. Total volume for the business fell during the shut-downs but only marginally and that hiccup a mere blip on the radar. Looking at the Q3 report I see no reason why Waste Management won’t continue to deliver solid results and keep increasing its dividend payments while it does.
Waste Management Delivers Mixed Quarter, Shares Rise
Waste Management reported a 5.1% decline in workday volumes for the quarter. This compares to a 1.9% increase in the 3rd quarter of 2019 and a 10.3% decline in the 2nd quarter of this year. Volumes were offset by interest gains but not enough to deliver positive revenue growth. Revenue fell -2.8% for the quarter versus a near -10% decline in the previous quarter and the consensus estimates of -6%.
"We've consistently pointed to operating EBITDA as the best measure of the health of our business, and despite the challenging backdrop, we delivered third-quarter adjusted operating EBITDA results in line with last year's record performance and expanded adjusted operating EBITDA margin by 70 basis points," said CEO Jim Fish. "This is a testament both to our team’s ability to optimize our business in the new environment as well as the progress of economic recovery in North America."
Moving down the report, the GAAP EPS of $0.92 missed the consensus target by a nickel but adjusted earnings did not. Adjusted EPS came ina t $1.09 or better than consensus by $0.07. Looking forward, the company expected EPS gains to accelerate to the point they’ve issued updated guidance. While they refrain from estimating an actual EPS figure the combination of volume rebounds, interest income, and cost-control efforts will drive a higher than expected margin for the full year.
"Given the strength of the company's third-quarter, which demonstrated the resilience of the business model and strong execution on reducing the cost to serve, the company expects to exceed its 2020 adjusted operating EBITDA margin guidance of 28.0% to 28.5% and generate free cash flow in excess of $2B."
Waste Management Has A Dividend You Can Count On
Waste Management is a consistently strong dividend payer and one with a 17-year history of distribution increases. The company is paying only 56% of consensus earnings, about 50% of actual earning (the consensus is too low, FYI) and 49% of next year’s EPS so there is no reason to think earnings won’t continue to support that story. Regarding the balance sheet, the company is carrying some debt but it is long-term in nature, well-managed, and fuelling growth. Aside from that, the cash balance is over $6 per share and free-cash-flow is on the rise.
The most recent deal is for Advanced Disposal worth about $4.6 billion. The deal expands Waste Management’s reach and positions it for revenue and EPS growth this year. The deal was approved by regulators the last week of October and closed the very next day.
The Technical Outlook: It’s Time To Put Waste Management On Your Watchlist
Shares of Waste Management entered a correction about a week before the earnings were released and may move lower. The selloff was sparked by a DOJ requirement that Waste Management and Advanced Disposal divest some of their assets before merging. The requirement was not unexpected but the sell-off was. Now, with shares down 7.5% from their recent high and results as they are, I can’t help but think the selling was a knee-jerk reaction that will quickly re-correct. If not, there is a chance price action could fall to the $100 level. In either case, the stock is worth a nibble.
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