Salameh dibaei/iStock via Getty Images
Waste Management (NYSE: WM) provides waste management and environmental solution services to residential, commercial, industrial and municipal customers. They are the largest waste management company in North America. During this time of uncertainty caused by the Omicron variant, Federal Reserve’s monetary policy change, and supply chain disruption, a company like Waste Management really shines. There may be nothing flashy about their business, but they are generating tons of cash, and their revenue grows as our economy gets bigger. I believe Waste Management provides a great investment opportunity because:
1. Their steady growth in revenue and earnings will continue for the foreseeable future.
2. Their cash generating ability remains exceptional.
3. Their economic moat will allow them to maintain a high profit margin despite high inflation, supply chain issues, and the labor shortage.
Continued revenue and earnings growth
Overall, it was a rock-solid quarter as expected. 3Q revenue grew 21% YoY, and EBITDA grew 14% YoY. Waste Management yet again demonstrated their strong business/pricing model, vast unrivaled asset network, and ability to manage costs. Furthermore, they raised revenue guidance based on a strong outlook. The company’s disciplined pricing program provides reliable price forecasts and waste volumes are projected to increase.
I expect this impressive growth to continue. One of the unfortunate side effects of increasing prosperity and economic activity is the generation of greater levels of waste. There is no way around it. The executives of Waste Management talked about the growing demand during the last earnings call. Volume growth was great last quarter, and they had to temporarily place some of their higher-cost trucks back in service. Although maybe less efficient, this really isn’t a terrible problem to have from the company’s perspective. Furthermore, waste generation is expected to steadily grow across the world for years to come. The breakdown of waste materials in American landfills and the global waste growth trajectory are shown below.
Strong cash generating ability
Waste Management’s amazing cash generating ability was once again on display. They generated nearly $1.2 B cash from operations last quarter despite margin pressure from supply chain disruption, labor shortage, and inflation. Their annual cash from operations has steadily grown from $2.5 B in 2011 to $4.1 B in 2021. As their business is almost certain to continue this growth into the future, I don’t see any indications that their ability to generate cash will tail off. The trend of cash from operations is shown below.
Data by YCharts
This strong cash generating ability is no accident. They have a disciplined price program that served as the primary lever to maintain good margins even during this environment of inflation. Also, they have been actively working towards automating any high turnover positions to reduce costs and the risk associated with labor shortages. As another cost-cutting measure, they use waste to create energy, by recovering gas generated during waste decomposition and then using this gas in generators to produce electricity.
High profitability enables investor rewards
A vast asset network (268 landfill sites, 348 transfer stations, …….