Waste Management, Inc.

Moat: 4/5

Understandability: 1/5

Balance Sheet Health: 3/5

A leading provider of comprehensive environmental solutions, providing services throughout the United States and Canada, operating within the broader waste management industry.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Waste Management (WM) operates a massive network of collection, transfer, disposal, and recycling facilities throughout the U.S. and Canada. Their main focus is on handling waste from the moment it is generated, all the way to its disposal or repurposing. The company has operations through the following business segments:

  • Collection: This is the largest segment, responsible for collecting waste from homes, businesses, and industries and also includes the hauling of waste from transfer stations to disposal sites.
  • Landfill: Operates landfills to dispose of the waste that can’t be reused.
  • Recycling: Processes recyclables collected across its network.
  • Renewable Energy: Generates revenue from landfill gas and other renewable energy sources, including natural gas.
  • Other: Includes a variety of complementary services, including consulting and waste-to-energy facilities.

Industry Trends:

  • Consolidation: The waste management industry has been trending toward consolidation, with larger players acquiring smaller companies. This enables efficiencies, economies of scale, and broader market reach.
  • Increased regulation: Regulations concerning waste disposal and environmental standards are becoming stricter, adding both complexity and potential barriers to entry for new players.
  • Sustainability focus: With the growing focus on sustainability, companies in the industry are being forced to adopt new technologies and methods for recycling and reducing waste.
  • Technology: Implementation of technologies such as AI and digitization is helping companies in areas like route optimization and improved collection.
  • Demand: Waste collection is an ever-present demand, driven by human activity and consumption. Thus the industry will be resilient through the different market cycles.

Competitive Landscape:

  • Dominant Players: The waste management industry is dominated by a handful of large players, with WM at the forefront. This creates economies of scale and provides considerable advantage to such large companies.
  • Geographical Niches: Although dominated by large companies, regional and local players play a significant role, especially in niche markets.
  • Capital Intensity: High capital costs associated with waste management makes it harder for newcomers to enter and compete directly.

What makes Waste Management different?

  • Scale and Scope: WM’s vast network and integrated operations make it hard for competitors to replicate its efficiency and cost structure.
  • Brand Recognition and Reputation: The sheer size and longevity of the company have built substantial brand recognition and customer relationships.
  • Regulatory Expertise: Navigating the complex web of federal, state and local rules is difficult to do. The experience and expertise of WM will give it an edge.
  • Investment in Sustainability: They have heavily invested in sustainability and renewable energy, creating a competitive edge.

Moat Analysis:

Rating: 4/5 (Narrow but Sustainable Moat)

  • Intangible Assets: The company benefits from its strong brand, client relationships, and a large customer base, although these aren’t always enough to deter competitors.
  • Switching Costs: Switching waste services can be costly and operationally difficult, creating some client loyalty and pricing flexibility for WM.
  • Cost Advantage Scale and Route density: A larger company with more customers and greater density in its routes gives greater profitability and more competitive pricing. However this is vulnerable to smaller competitors that have niche pricing or operational expertise.
  • Network Effects: The company doesn’t have a strong network effect and may face competition from the new entrants

Overall, WM’s competitive advantages create a narrow but solid moat that can protect the business for the foreseeable future, but isn’t enough to give them a truly dominant position.

Risks to Moat and Business Resilience:

  • Environmental regulations: Stricter regulations and environmental taxes may increase operating and compliance costs.
  • Market disruption: New recycling technologies or waste disposal methods could weaken the viability of landfills and other businesses.
  • Intense competition Aggressive pricing from new competitors can affect WM’s pricing power. Also, in low margin markets, any slight fluctuation may dramatically affect profitability.
  • Labor Costs Given the labor shortage in the market, there is a real possibility of rising labor costs that cannot be immediately offset and absorbed, affecting profitability.
  • Economic Downturn: Economic slowdown can decrease demand from customers, especially commercial and industrial clients.

Financial Analysis:

Key Points:

  • The company operates primarily in the US with some presence in Canada.
  • It is quite large, boasting over $20 billion in revenue in 2023.
  • It is profitable, with almost $1.8 billion in net income in 2023.
  • Is not overly leveraged.
  • Strong and stable cash flows.

Revenue & Earnings Analysis:

  • Revenues: WM’s revenues come mainly from its core collection and disposal business (around 75% and 15% respectively in 2023), with recycling and renewable energy making up a smaller share (around 5% and 4% respectively in 2023).
  • Growth: WM’s revenues have historically grown in tandem with the economy, but the growth of their renewable energy segment has shown to be more volatile and dependent on external factors. For the near future, a growth rate between 2% to 5% is expected.
  • Margins: The margins are respectable, but they can face challenges in times of high inflation. Their main source of growth is through revenue increases, as they struggle to reduce costs relative to their competition. Their goal is to maintain their margins through price increases.

Financial Position:

  • Cash flows: The company has a positive operating cash flow, allowing it to repay debts and pursue investments and acquisitions.
  • Debt: WM’s balance sheet is sound but not exceptionally strong, with debt being slightly more than equity. Debt is rated at Baa1 by Moody’s, indicating an investment grade company.
  • Asset Allocation: The company has a good mix of tangible and intangible assets and has invested heavily in renewable technologies and waste management facilities.

Financial Metrics:

  • Net Profit Margin: Ranged from 14.6% to 9.2% in the past five years, with 7.8% being the last reported.
  • Return on Assets: Has fluctuated between a low of 3.7% to a high of 6.3%.
  • Return on Equity: Returns on Equity have been high due to its higher leverage, fluctuating between 19.8% and 12%.
  • Total Revenue Growth: Has been 12.5% between 2018 and 2023. With 6.9% in 2023.

Recent Concerns/Controversies/Problems

  • Price Pressures: The company has been recently facing increased competition, especially in the recycling area. This led to increased pricing pressure and lower profitability. However, the company is using strategies including raising prices, focusing on high margin activities, and cost reduction measures to offset those challenges.
  • Increase in Operating Expenses: The company has seen an increase in its operating expenses lately, largely due to inflation. To offset this, the company is trying to increase the sales prices and reduce costs.
  • Environmental Concerns: Companies in the waste management sector are constantly under scrutiny due to their environmental footprint. A more strict government approach might reduce profits.
  • Transition During the latest earnings call, the management mentioned that the recent transition of a major executive has not affected operations, but more information and stability are required before passing any judgements.

Understandability:

Rating: 1 / 5 (Very Easy to Understand)

The waste management business is extremely simple to understand for anyone, being based on the collection, transfer, and disposal of waste. The simple business model coupled with readily available information makes it very easy to grasp.

Balance Sheet Health:

Rating: 3 / 5 (Fairly Healthy)

  • Leverage: The company has moderate leverage on the balance sheet, with debt/equity ratio standing at 1.53, but the majority of the debt (around 73%) is held at a long term rate.
  • Assets: The asset side includes a considerable amount of fixed assets which are usually used to obtain a higher borrowing capacity.
  • Liquidity: Despite having large debt, the company generates more than enough cash flows to comfortably service its debt obligations. The operating cashflows for the past 12 months are about 4 billion dollar.

Overall, the company’s balance sheet is not excessively leveraged or debt ridden, but it doesn’t have much free assets to allow it to operate at low debt levels, and is rated as average for the time being.