Should You Sell This Garbage Stock?

Up nearly 25% in 2013, Waste Management is now expensive by one important valuation metric.

Jan 9, 2014 at 4:43PM

With the S&P 500 now over 1,800, you may feel compelled to start booking some profits. While many blue-chip dividend stocks are not yet overvalued on a fundamental basis, there are a few stocks that have run up quite a bit. Depending on your time horizon and circumstances, now may be an ideal time to lock in some of those gains -- particularly for Waste Management (NYSE:WM)

This Houston-based municipal provider of waste hauling, recycling and waste-to-energy services is, in management's own words, a free cash flow machine. A favorite among dividend growth investors, Waste Management was nonetheless having trouble maintaining its growth momentum over the last couple of years. 

But over the last couple of quarters, a number of Waste Management's cost-saving initiatives and synergies have put more fire into this company. This includes Waste Management's conversion of its entire fleet to run on liquefied natural gas. While volumes declined in this quarter, price hikes and effective cost management have boosted margins across the board. Yield, which here is defined as revenue from collection, transfer and waste to energy disposal operations, has risen to 2.3% -- three times that of the same quarter last year. 

Rich valuation
All this progress has buoyed the stock price as well. Shares have risen by more than 24.4%. Waste Management now trades at almost 21 times trailing earnings -- by no means cheap.

Looking at Waste Management's average price to earnings, or P/E, ratio over the last 15 years confirms the stock's relative priciness. In fact, Waste Management's average P/E ratio over the past 15 years is 19.1 times. This means that Waste Management is historically overvalued by 9.5%.

While this stock may not yet be grossly overvalued, those who invested for the dividend just a few years ago are now sitting on gains of around 30%. Depending on your situation, you might want to think about collecting some of that windfall now.

Waste Management has proven itself to be great operator over the last couple quarters. It has managed costs very well and has waste collection down to a science. Indeed, margins are steadily rising higher, but waste volumes are now stagnant.

In the long run, Waste Management is a synergy story. Its cash flow and dividends should reaccelerate beyond the meager growth of last year, but it probably won't be anything like the double-digit growth of years past. 

Republic Services (NYSE:RSG), Waste Management's biggest competitor, trades at a more reasonable 18 times trailing earnings, much closer to its average P/E ratio. Analysts also expect to see at least modest growth from Republic. Republic may be a somewhat better value here, but it also has a slightly lower return on assets than Waste Management, as well as slightly lower margins over the last few years. 

Bottom line
Regardless of where Republic stands, in my opinion Waste Management is moderately overvalued, and no longer the high-growth story it was years ago. If you were in the stock primarily for dividends, but are now sitting on outsized capital gains, you might want to think about whether Waste Management still merits a place in your portfolio. 

Casey Hoerth has no position in any stocks mentioned. The Motley Fool recommends Waste Management. The Motley Fool owns shares of Waste Management. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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