Garbage behemoth Waste Management (NYSE: WM ) takes more junk off our hands than any other company. Most recently, Waste Management has grown even larger -- mostly through acquisitions. But are these acquisitions tidying up the company's balance sheet or just soiling the bottom line?
Not only does Waste Management dispose of our trash, it generates energy from it. The company has an enormous and geographically diverse customer base that includes 20 million clients. Significant barriers to entry and extensive permitting requirements prevent others from polluting Waste Management's market share.
But the company's squeaky-clean standing has come at a cost to shareholders. Waste Management has been on a shopping spree buying back its stock -- $575 million in 2011, $501 million in 2010, and $226 million in 2009. I love seeing companies buy back shares as long as it's for the right reasons. However, shareholders have not been rewarded in this case. The stock price in early January 2009 was $33.57; today it trades near $35.
Acquiring more junk
Waste Management's revenue hit a speed bump in 2009 but has grown since, in part due to an acquisition. While still just short of its 2008 peak, revenue in 2011 grew by $863 million, or more than 6%. Yet Waste Management bought Oakleaf -- an outsourced waste services company -- in July 2010, and the revenue gains from the acquisition mask weakness in the company's organic growth rate.
I can't help but think that Waste Management's plan for future growth is solely through acquisitions. At least, that's been its main strategy recently -- the company spent $867 million in acquisitions in 2011, $407 million in 2010, and $281 million in 2009.
Employee pension plans pose another problem for Waste Management. It is a participating member in nine multi-employer plans, seven of which are funded at less than 65% of what they'll need to meet obligations. While Waste Management certainly isn't the only company facing this problem, the company's bottom line will inevitably take some blows to meet these commitments.
Refuse is big business, and several companies operate in this space. Republic Services (NYSE: RSG ) is a solid-waste company with national presence, while Waste Connections (NYSE: WCN ) is a smaller, more regional competitor. Neither company operates an energy generation division.
Sales -- 5-Year Growth Rate
Price to Book
|Waste Management||$15.9 billion||0%||17||2.6|
|Republic Services||$11.1 billion||21.7%||20||1.5|
|Veolia Environnement (NYSE: VE )||$7.3 billion||1.2%||NM||0.8|
|Waste Connections||$3.5 billion||12.8%||22||2.6|
Sources: Yahoo! Finance, The Motley Fool. NM = not meaningful because of negative earnings.
While both Republic Services and Waste Connections have experienced strong sales growth, it has slacked for both Waste Management and French company Veolia Environnement, which provides waste management services and energy generation.
The price-to-book ratio compares a stock's market value to its book value. A lower price-to-book ratio could mean that the stock is undervalued. At present, Veolia appears to be considerably better valued than the competitors.
I view Republic Services as a likely threat; it has the size and scope to hurt Waste Management. In contrast, I see Waste Connections as yet another acquisition target for Waste Management. While Veolia does not have considerable market presence in the U.S. at this time, look for that to potentially change and menace Waste Management.
Waste Management is the type of business I prefer -- recurring revenue (we continue to dispose of our trash everyday), dull (does it get more uninteresting than garbage?), high barriers to entry, and fairly recession-resistant. But I just can't vouch for buying this stock right now. I'll keep an eye on it and add it to My Watchlist, but I want to see organic growth from the company before I add it to my portfolio.
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