Waste Management's No Litterbug

In corporate corner offices around the nation, talk of constriction in the credit markets appears to have been trumped by a desire to cash in on Wall Street's latest hissy fit. And so it is that Wall Street's buyback binge resumes. Who's in the stock certificate recycling game this time? None other than Motley Fool Inside Value recommendation Waste Management (NYSE: WMI), which on Tuesday announced it will be spending another $300 million to continue buying back shares in the waning weeks of this year.

I say "another $300 million" because, according to the press release, Waste Management had added cash to its buyback program once already this year, bringing its buyback authorization for this year to $1.2 billion. Waste Management has nearly run through that sum, but with just a few weeks remaining in fiscal 2007, it still wants more shares. And so the board is writing another check. But can Waste Management really afford to spend $1.5 billion on its own shares this year? And even if it can, should it? These are the questions we'll be asking today.

Can it pay?
Sure can. Waste Management still has $654 million on its books, so it can fund the additional share repurchases out of cash on hand. More importantly, there's more cash where that came from. Waste Management generates dump truck loads of the stuff every year. Over the last 12 months, free cash flow has approached $1.3 billion.

Should it pay?
Of course, the question still remains whether Waste Management might be better off using its cash to pay down some of its nearly $8.3 billion in debt. To get an idea of which is the better use for its cash, I decided to compare the company with a few of its rivals:

	P/E	Price-to-Free Cash Flow	Projected Growth Rate
Waste Management	17	14	10%
Republic Services (NYSE: RSG)	24	16	10%
Clean Harbors (Nasdaq: CLHB)	24	100	20%
Waste Connections (NYSE: WCN)	24	22	13%
Allied Waste (NYSE: AW)	33	13	12%

*Capital IQ LTM.

Foolish takeaway
When I look at these numbers, I have to wonder whether Waste's own management has been sitting downwind of the garbage fumes. I realize that the company is throwing off a lot of cash. I realize also that it's slightly cheaper when valued is based on its free cash flow, rather than on net earnings. And I certainly understand the temptation to say, "Everybody else gets a higher P/E, so we must be cheap."

But I just must disagree. From a PEG standpoint, ain't nobody cheap here. The only company that even lives in the same ZIP Code as "cheap" is Allied Waste, and then only when valued is based on free cash flow. And as for Waste Management, with a 1.7 PEG and a price-to-free cash flow-to-growth not much better, the stock looks too expensive to recycle. Much better to use the cash to compost some of that debt.