Performance: -2.3%
New York-listed Waste Management (WM) was one of the smaller losers in our portfolio for the four-month period, with a 2.3% loss. The company provides waste management services including collection, transfer, recycling, resource recovery, and disposal services, and operates waste-to-energy facilities. WM serves municipal, commercial, industrial, and residential customers throughout North America.
The thesis for the company is a business that will always have demand and be profitable. Waste management is essential, and as the population grows, so will the amount and types of waste, through which waste management companies can expand their business and monetise. As an industry leader, WM has the largest and most diverse asset and customer base in its region, allowing it to leverage on technology to for growth in the business and its moat.
WM performed well and beat expectations for the most recent financial period, driven by strong pricing and volume growth. Through the acquisition of Advanced Disposal in 2020, WM continues to further strengthen its position in the solid waste industry by increasing its market share and achieving significant cost synergies. It is key for companies in this industry to be ESG-friendly (environmental, social and governance) to avoid unnecessary complications, and WM’s focus on increasing exposure to the renewable energy segment by constructing renewable natural gas plants is strategic. Further, structural labour concerns can be addressed through the company’s investments in expanding and modernising recycling facilities. Its management also reaffirmed its guidance for the rest of the financial year, indicating that the company is expected to perform well.
At current prices, the company’s yields are attractive compared to the risk-free rate of 3.3%. WM’s earnings yield, operating cash flow yield and free cash flow yield are 3.5%, 6.2% and 4.0% respectively. WM also pays dividends, though its yield of 1.8% is less attractive than the risk-free rate. Compared to regional peers, the company trades at a 2% and 10% discount for its forward P/E and EV/Ebit respectively, implying that it is an attractive pick compared to other companies in the industry.
Sentiments-wise, there are seven “buy” calls, 10 “hold” calls and one “sell” call from analysts. The average target price for the company is around 20% above its current trading price of US$140.65 ($192.75). Based on our revised in-house valuations, we think its fair valuation is at least 10% above its current trading price. WM is a stock to buy and hold and is suitable for long-term investors with low risk tolerance.
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Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk.
