Waste Management, Inc. (NYSE:WM)reports on an active year for the company Wednesday morning before the markets open. Let's review four key items investors should be aware of before the earnings release hits the wires on Wall Street.
Revenue growth may be modest
Despite a macroeconomic environment that still presents challenges, Waste Management has been able to post quarter-over-quarter revenue increases lately. The trend, however, is a bit precarious:
|Quarter||Reported Revenue||Prior- Year Quarter||Percentage Change|
As you can see, Waste Management is beating prior-year results each quarter, but by a smaller and smaller margin. This is partially due to the loss of a few national contracts in 2014 that were only marginally profitable.
Investors will hope that Waste Management tracks ahead of prior-year revenue in quarter three at a pace closer to the end of 2013, that is, at a 2%-5% clip. If it doesn't, however, and (as the trend indicates) revenue declines, the outlook won't necessarily be dim -- as long as the company's earnings reveal the benefit of focusing on more profitable business contracts. In Q3 2013, the company earned $291 million, or $0.62 per diluted share. Look for progress against these numbers should Waste Management track backward on its revenue.
Wheelabrator revenue replacement is already under way
In July, Waste Management announced the sale of its Wheelabrator Technologies business to Energy Capital Partners. The Wheelabrator business provided income to Waste Management in two ways: The company collected waste-hauling fees for moving waste to Wheelabrator's plants, and it also sold the energy those plants generated from waste. The company disposed of the energy-generation plants in the transaction; however, it will continue to haul waste to Wheelabrator's plants.
One of management's tasks following this $2 billion sale is the replacement of $220 million, or 6.6%, of Waste Management's earnings before interest, taxes, depreciation, and amortization, or EBITDA. We've discussed previously that the company intends to use part of the sale proceeds to make incremental acquisitions to add back the lost EBITDA. Earlier this month, Waste Management announced that it would purchase through a subsidiary the outstanding stock of Deffenbaugh Disposal, a privately held waste-hauling company headquartered in Kansas City.
While terms of the deal have not been disclosed, according to Stifel, Nicolaus & Co., which served as advisor to Deffenbaugh, the purchase will replace about 25% of Waste Management's lost EBITDA. This is a quick and significant replacement acquisition, and investors will be eager to hear any details disclosed by management regarding this transaction, and any further discussion regarding future "tuck in" acquisitions, on Wednesday's earnings conference call.
Will moderating inflation curb results?
Inflation may not be welcome when you and I draw out our checkbooks, but it is a friend to Waste Management, which obtains some of its revenue increases via contract escalations, which are based on increases in the Consumer Price Index, or CPI. Management has indicated this year that the mildness of inflationary pressures in a still lukewarm economy presents a slight headwind in achieving its revenue growth.
Through September of this year, the CPI's unadjusted 12-month U.S. City average inflation growth stands at just 1.7%. Thus, we may hear some mention of the softness of the CPI index in the company's earnings call on Wednesday. While the weakness of inflation-driven price increases poses a slight hurdle for the company's "price over volume" strategy, there is one notable benefit that may impact earnings. The price of gasoline (all types), as measured by the CPI, has decreased 3.6% over the same period, with most of that result driven by a 4.1% decrease in August 2014 -- the second month of Waste Management's third quarter. Such price dips are a boon to Waste Management's vast fleet of waste hauling trucks.
Will housing softness affect the numbers?
During the company's last earnings call in July, management described how important it is for the housing recovery to maintain momentum. As CEO David Steiner explained, sustained new housing development in various geographic regions draws the gas stations, small businesses, and retailers that all become Waste Management customers.
Since midyear, however, there is some evidence that the housing recovery has started to sputter. The Case-Shiller Price Index, a widely watched measure of home pricing, recorded a "broad-based" deceleration of home price increases in July, with the U.S. national index posting just a half-percent increase (the index has gained 5.6% for the year). If there is a drag on earnings reported this Wednesday, this may be one of the reasons cited.