After Waste Management (WM 0.48%) reported its first-quarter results, its leadership team shared some important information with investors during the subsequent conference call. Here are the key takeaways for long-term shareholders.
1. Volume growth and price increases are fueling results
Our collection lines of business continued to perform exceptionally well. In the first quarter, commercial core price was 7.9%, with volumes up 2.5%, a 50-basis-point improvement from the fourth quarter. Industrial core price was 9.7%, with volume up 2.7% in the first quarter, up 170 basis points from the growth that we saw in the fourth quarter of 2016.
Waste Management enjoys strong pricing power derived from its irreplaceable network of landfills, transfer stations, and recycling centers. This was once again evident in the first quarter, with collection and disposal core price -- which consists of price increases net of rollbacks and fees -- coming in at 5.1%. Combined with companywide volume gains of nearly 2%, these price increases helped to fuel revenue and operating growth of 8% and 10%, respectively, along with a 14% increase in earnings per share.
2. Customer retention is the strongest in years
Our continued focus on customer service is having a positive impact on volumes, as we achieved the lowest churn since the third quarter of 2002 at 8.3%, an improvement of 90 basis points from the first quarter of 2016. Our field collection, call centers, sales, and technology teams are aligned around improving service to our customers in a world-class manner, and our results demonstrate this alignment.
Waste Management is doing a solid job of keeping its customers happy, as evident by its low churn rate. That's important, because it keeps the competition at bay and helps to improve profit margins.
3. Recycling prices remain volatile
In the first quarter, we saw recycling commodity prices up almost 70% at our recycling facilities. Yet in the beginning of the second quarter, we've seen those prices drop significantly. Due to this commodity-price volatility, we're leaving our guidance for the recycling business unchanged, but the bias is to the upside, and that should become clearer after the second quarter.
For much of the last half-decade, low prices for recycled materials have dragged on Waste Management's business. In turn, the company sold or closed about 20% of its recycling facilities during that time.
In recent quarters, however, Waste Management has enjoyed a reprieve from lower recycling prices. Still, commodity markets are likely to remain highly volatile, and management appears hesitant to alter its current strategy, which is focused more on cutting costs in its recycling operations rather than looking to aggressively expand the business. That's a prudent approach -- one that will benefit shareholders whether commodity prices surge or fall.
4. Management is hunting value-creating acquisitions
So when we think about M&A [mergers and acquisitions], we're certainly interested in core acquisitions. And to your question, we would define core as being, of course, core solid waste, industrial, hazardous, potentially energy services, even recycling. All of those, we throw in that core bucket. So anything that would be a good strategic fit for us within those core buckets at a fair price, we would consider, and we continue to look for those.
Waste Management's growth-through-acquisition strategy has been a boon for shareholders. Due in part to the regulatory hurdles and homeowner objections to building new waste facilities, the company tends to focus more on making multiple small acquisitions every year to expand its operations. In this way, it's able to further consolidate the waste-collection industry and strengthen its competitive moat.
5. Waste Management excels at turning customer trash into investor cash
We generated $396 million of free cash flow in the first quarter of 2017, which exceeded our expectations. This strong performance puts us well on our way to achieving free cash flow guidance of between $1.5 billion and $1.6 billion for 2017.
Waste Management plans to return about $500 million to investors via share buybacks later this year. The company also recently raised its dividend, an annual trend that's spanned 14 consecutive years. And with U.S. population and economic growth likely to continue to bolster trash volumes for the foreseeable future, investors can expect more dividend increases -- and corresponding share-price appreciation -- in the years ahead. Waste Management remains an excellent low-risk stock for investors to consider buying today.