Has Waste Management Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Waste Management (NYSE: WM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Waste Management.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 0.0% Fail
  1-Year Revenue Growth > 12% 6.9% Fail
Margins Gross Margin > 35% 36.2% Pass
  Net Margin > 15% 7.2% Fail
Balance Sheet Debt to Equity < 50% 153.8% Fail
  Current Ratio > 1.3 0.78 Fail
Opportunities Return on Equity > 15% 15.5% Pass
Valuation Normalized P/E < 20 16.72 Pass
Dividends Current Yield > 2% 4.1% Pass
  5-Year Dividend Growth > 10% 9.1% Fail
       
  Total Score   4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Waste Management last year, the company has kept the same four-point score. The trash and recycling leader boasts strong dividends, but it hasn't been able to grow lately, and debt levels remain elevated.

Waste Management is the biggest waste services company in the U.S., with trash collection and recycling programs around the country. Even with Republic Services (NYSE: RSG  ) having bought up Allied Waste a few years back, Waste Management retains its stranglehold on the domestic industry. It should be able to continue using economies of scale to maintain its competitive advantage over Republic and the much smaller Waste Connections (NYSE: WCN  ) , which is still in a stronger growth phase and hasn't yet built up the extensive network that Waste Management has.

But tough economic times actually have an impact even on trash. Waste Management's stock lost ground in 2011, especially as municipal governments had trouble with their budgets. Yet the company has made attempts to grow the business through new initiatives including energy production from trash. In addition, the health-care waste services market has promise, as Stericycle (Nasdaq: SRCL  ) has demonstrated with its success in the niche.

Looking forward, Waste Management's biggest growth opportunity lies in overseas markets. So far, the company has largely ceded the world to Veolia Environnement (NYSE: VE  ) and other international players. But with Veolia taking steps to restructure its worldwide operations and consolidate its footprint, the door lies wide open for Waste Management to step into the vacuum and grab up what could be lucrative business.

For Waste Management to improve, it needs to have those growth initiatives bear fruit. With dividends already yielding 4%, more attention to reducing debt would also get the company moving in the right direction to get closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Waste Management isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Waste Management to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Waste Management, Stericycle, Republic Services, and Veolia Environnement, as well as writing a covered strangle position in Waste Management. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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