Humans will likely never stop throwing things away -- and Waste Management (WM 1.19%) will be there to pick it up. This North American company collects, transfers, stores, and recycles a large portion of the U.S. and Canada's trash. Its market share and financial position, combined with sustained demand from consumers, make a business that will likely stick around and continue to pay out its shareholders for many years to come.
Unwavering financial position
Waste Management was able to perform well during the second quarter, flexing its strong market share. The company grew revenue by 25.7%, primarily driven by an increase in volume -- how much trash it hauled -- of 9.6%. Either it's gaining market share, or society is making more trash; both are good signs for Waste Management. It also grew operating income by 50%, resulting in GAAP earnings growth of 15% to $0.83 per share.
As one of the biggest and best trash collectors, Waste Management seems likely to continue this strong performance. In 2020, it managed 26% of all the landfill volume in the United States, trailing only municipalities -- meaning every single town and city in the United States, combined. Its main competitor, Republic Services (RSG 0.55%), had just 19% of the landfill volume last year.
After acquiring Advanced Disposal in October of 2020, Waste Management now commands an even greater share of landfill volume in the U.S. The two businesses combined reached 31% market share in 2020. In just two quarters, Advanced Disposal has contributed $597 million in revenue to Waste Management -- representing 7% of the company's total revenue in that period -- solidifying Waste Management's dominant position in the industry.
Investors will continue to collect
The trash business has surprisingly high barriers to entry for any competitor aiming to disrupt the market. In the second quarter, Waste Management reported that it owns $14 billion in property and equipment. Any start-up in a low-margin, boring industry like this would take a long time to gather even half that much in landfills and disposal trucks. Waste Management has been accumulating useful assets and market power since the late 60s, giving it a huge head start on any would-be new rivals.
That strong competitive position has helped Waste Management reward shareholders nicely. In the second quarter, it projected between $2.5 billion and $2.6 billion in free cash flow (FCF) for the full year of 2021, part of which will fund $850 million in additional share repurchases for the rest of the year. The business has also repaid over $2 billion in debt so far this year, which should have investors jumping for joy.
Even if investors aren't fond of trash, Waste Management's leaders seem to care a lot about it. All three top executives made their way up the ladder, holding numerous roles within the business before marking their way to the C-suite. Combined, the CEO, COO, and CFO have spent 59 years managing trash for Waste Management.
At 57, CEO James Fish still has plenty of years to grow the company -- with nine other current executives younger than him, all of whom have enough experience to feasibly succeed him. And these young but experienced managers help the company score rave Glassdoor ratings from its rank-and-file employees: 3.7 stars out of 5, and 82% approval of the CEO.
A high price for rubbish
If this business has one garbage trait, it's the valuation. Waste Management trades at 25.3x management's estimated FCF for the full year of 2021, and 40x current trailing-12-month earnings -- a steep price for a trash business guiding for mid-teens long-term revenue growth.
Sustainably focused competitors could also leave Waste Management and its investors down in the dumps. Environmental groups and the media tend to dump Waste Disposal off their list of sustainable businesses. But Waste Management has made recent efforts to shift toward sustainability. As of November 2020, the company had 50% of its trash-truck fleet running on compressed natural gas, with 20% running on renewable natural gas -- including methane harvested from its own landfills. It also uses many of those dumps, their land, and/or the gases leaching from all that buried trash to generate renewable energy.
Despite all of these efforts, the waste industry typically gets tarred with a dirty image. A preexisting competitor like Republic Services could shift its focus and its marketing toward sustainability and lure away WM's customers. Rivalslike Waste Pro or GFL -- which are already focused on sustainable trash disposal and transportation -- could pose a similar threat.
Waste Management has been the industry leader since 1982, and its management team is not showing any signs of stopping. This garbage business has derived an astounding financial performance from its market position and strong competitive advantages. With all these factors in the bag, Waste Management could continue innovating and dominating the garbage industry for the next 20 years.