Foolish Forecast: Waste Management Does a Planet Good

Tony Soprano made big money in garbage. But can a small outfit like Motley Fool Inside Value  Waste Management (NYSE: WMI) do the same? We'll find out at the crack of dawn tomorrow, when the nation's biggest name in garbage reports its Q3 2007 numbers.

What analysts say:

• Buy, sell, or waffle? Eleven analysts follow Waste Management, giving it nine buy ratings and a pair of holds.
• Revenues. On average, they're looking for sales to slip 1% to $3.41 billion.
• Earnings. Regardless, profits are predicted to rise 7% to $0.59 per share.

What management says:
Is there such a thing as "Compassionate Capitalism"? (Actually, there is. It's a book by Salesforce.com (NYSE: CRM) CEO Marc Benioff). Can a company really do well by doing good? (BP (NYSE: BP) and its new moniker "Beyond Petroleum" think so.)

Over at Waste Management, CEO David Steiner has also hitched his wagon to the garbage truck of environmental protection. In a presentation at the World Business Forum earlier this month, Steiner described Waste Management's efforts to double the amount of power it produces from "waste-based energy production," more than triple the volume of material it recycles, and more than quadruple the number of its facilities certified by the Wildlife Habitat Council -- all by 2020. The firm also aims to invest as much as $500 million per year over the next 10 years to improve fuel efficiency in its garbage truck fleet.

At least three of these initiatives promise to "do well" for shareholders while also doing good. Selling energy is good business these days. Steelmakers Nucor (NYSE: NUE) and Steel Dynamics (Nasdaq: STLD) make their living -- and beaucoup profits -- recycling old iron into new steel. And cutting fuel costs in an era of record-high gas prices? That's a no-brainer for the bottom line.

What management does:
Cost containment has already proven good business -- and necessary -- at Waste Management. So far this year, revenues are already down 1.4%, but operating margins are on the rise thanks to the firm cutting its operating costs by 3.5% to (more than) compensate. They're not yet at the level that rivals Allied Waste (NYSE: AW) and Republic Services (NYSE: RSG) boast, but they're getting there.

Margins	3/06	6/06	9/06	12/06	3/07	6/07
Operating	14.3%	14.8%	15.3%	15.4%	15.9%	16.4%
Net	9.2%	8.3%	8.9%	8.6%	9.0%	8.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Over at Motley Fool Inside Value, where we've been known to dumpster-dive from time to time, we've recommended Waste Management for three key reasons. Bargain-hunting guru Philip Durell sums up his investment thesis thusly: "The company consistently produces a ton of cash and just as consistently returns it to shareholders through dividends and buybacks. These undervalued shares make an excellent low-risk investment in a long-term predictable business."

Since Philip penned those words, the picture he painted at the time hasn't changed much. Waste Management has generated $594 million in free cash flow (down 9% year-over-year, but improving in the second quarter). Yielding 2.5%, the dividend is almost as rich as when Philip recommended the stock. And the company is still buying back shares -- spending $196 million for this purpose last quarter.

Did Waste Management keep on truckin' in Q3? We'll have a detailed update on the firm's performance for our subscribers shortly after earnings come out. Make sure to sign up for your free trial to Inside Value now, to ensure you can read the update as soon as it comes out.