When it comes to investing, many of us are drawn to companies whose products and services we like, such as Starbucks (Nasdaq: SBUX ) , Home Depot (NYSE: HD ) , Wal-Mart (NYSE: WMT ) , and Pfizer (NYSE: PFE ) . But sometimes compelling investment opportunities are presented by companies whose products or services make us hold our nose and turn away.
Meet Waste Management (NYSE: WMI ) . In its own words, the $16 billion company is "its industry's leading provider of comprehensive waste management and environmental services. Based in Houston, the Company serves municipal, commercial, industrial and residential customers throughout North America."
The stock trades at a price-to-earnings (P/E) ratio of about 21, and a forward P/E (based on next year's expected earnings) of about 18. That's not exactly bargain-basement, but it's enough to pique this investor's interest.
Every silver lining has a cloud, right? Well, Waste Management is no exception. There are a handful of reasons why this might not turn out to be a stellar long-term investment. Let's get the bad news out of the way first. Here are some drawbacks or possible drawbacks:
- The greasy residue of scandal. In the late 1990s, the company was embroiled in a massive accounting scandal, with management accused of engaging in fraud by inflating earnings and lining their pockets with millions in bonuses. The firm restated nearly $2 billion in earnings and lost some $25-billion-plus in market value. Ugh.
- The specter of possible new scandals. In 2001, a Wall Street Journalarticle (subscription required) suggested that the company's accounting practices might not yet be squeaky clean, as it lambasted the firm for boosting earnings by classifying the painting of trucks as an "unusual" expense.
- Rules, rules, rules. Waste Management must contend with a lot of regulation, such as required permits and limits on what can be transported where or disposed of where. Sometimes these regulations can hamper profitability.
- Recycling and conservation. Yes, it's good for the environment, but any trend that involves reducing trash output is not music to the ears of a trash hauler.
- Potpourri. Other risks include the costs of lawsuits and of dealing with or fighting unions, rising fuel prices, and even bad weather, which can affect the company's operations.
- One last concern is that some of the company's numbers aren't what an investor would ideally like to see. Revenues, for example, have been slipping over the past few years. (This is partly due to the firm's curtailment of some global operations.) And profit margins (both gross and net) have been fluctuating more than growing.
I hope you're still reading, because there is an upside! Here are some green flags:
- The company has a sustainable competitive edge -- a moat, as some would call it. Waste Management owns nearly 300 landfills across America and 16 waste-to-energy facilities, representing nearly 40% of the total U.S. disposal capacity. These kinds of things are hard, if not impossible, for any competitor to develop, especially in today's America, where few communities would welcome a new landfill. This kind of advantage gives Waste Management more power to raise prices, and thereby boost profitability.
- A number of Waste Management's numbers are moving in a positive direction. For example, return on assets (ROA), which measures how much bang a company is getting per dollar of assets, has been rising over the past few years, from -1.8% in 1999 to -0.5% in 2000 to 2.6% in 2001 to 4.2% in 2002. Return on equity (ROE) has risen from -2.0% in 2000 to 9.3% in 2001 and 15.5% in 2002. Earnings per share have been rising steadily, as has net income, which moved out of the red and into the black a few years ago.
- Waste Management enjoys a reliable stream of cash flows from operations that significantly exceeds its reinvestment needs. (In other words, it's making more money that it needs, meaning there is money available to be used for dividends or other means of boosting shareholder value. Waste Management holds a 28% share of a $40 billion market. It has some 20-million-plus customers.
- The company is focused on improving itself. It lists among its goals reducing costs and improving customer service and overall performance. These kinds of things should result in a fatter bottom line. Progress has already been made, with the company reporting customer churn under 10%, commercial missed pick-ups per thousand customers down from 3.1 to 1.6, and the average time to answer customer-service calls down 38% to 18 seconds. The company is saving hundreds of millions annually by optimizing its routes and improving its procurement practices.
- In 2003, the firm aims to increase revenues internally, to grow earnings per share by double-digits annually, increase profit margins, generate nearly $1 billion in free cash flow, and repurchase $600 million to $1 billion in stock.
- Finally, there's the dividend. Waste Management declared an annual dividend of a penny per share last month, and announced plans to pay out a full 75 cents per share annually beginning in March 2004. That would give the company a dividend yield in the neighborhood of 3%, which is fairly respectable. (If that appeals to you, you'll want to check out our new newsletter, Motley Fool Income Investor.)
Back Up the Truck?
So should you back up the truck and load up on Waste Management shares? Well, give it some thought. I haven't done so myself, but I'll keep an eye on this one. If its price falls any more, it will become even more attractive.
Meanwhile, see what others are saying (and share your own thoughts) on our Waste Management discussion board. If you're not already a participant in our acclaimed discussion board community, take advantage of a painless free trial, to see what all the fuss is about.
"I hope I don't forget to take out the trash this week" is worry number 734 onSelena Maranjian'sanxiety list.For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.