Inside Wall Street: Waste Management Could Strike It Rich in Chinese Trash

Gene Marcial's Inside Wall StreetInvestors have been treating the shares of solid-waste management companies like they were, well, garbage. In the past two years, the trash-disposal companies' stocks have been laggards as fierce competition, the recession and low inflation that prevented companies from raising prices crimped earnings and sliced margins.

But the fundamentals have turned up, analysts say, as volume trends improved starting in 2010 with the onset of an economic recovery. And the outlook for 2011 is even better, with volume expected to turn more positive for some companies as early as the first quarter, notes Michael Hoffman, waste-industry analyst at Wunderlich Securities.

Indeed, starting in early January, shares of Waste Management (WM), the largest solid-waste disposal company in North America, have been jumping to new record highs, rising to more than $37 apiece from a 52-week low of $31 in June. Some pros figure the stock will leap to between $45 and $50 sometime this year. The company's services include collection, recycling, resource recovery and disposal.

The added impetus for the stock's recent rise: China.

Doubling Revenue From Power Generation

Waste Management has been beefing up its investment for global growth, which is expected to accelerate even more this year, and its main target is China. Apart from having become a dividend play and a company that's been repurchasing its own shares and stepping up acquisitions, Waste Management is seen by some investors expanding its presence in the vast Chinese market, where it has already put down stakes.

In March of 2010, Waste Management acquired a 40% ownership for $142 million in Shanghai Environment Group, a leading waste-to-energy company in China. So far, Waste Management has built two plants in the country, with three more under construction. The company has said publicly that its waste-to-energy business in China will be part of an expansion program that would double its revenues from power generation.

Waste Management's waste-to-energy subsidiary, Wheelabrator Technologies, will be the primary growth engine in the international market, said CEO David Steiner in a statement last April when the company first revealed its plan to make a bid for a stake in a Chinese company. The Beijing government has committed to build more than 100 plants that convert waste into electricity over the next five years, and Waste Management expects to participate in that build-out.

"That Means Tremendous Growth"

Investors have started to see the vast potential of Waste Management's entry into China, which analysts say has surpassed the U.S. as the world's largest municipal solid-waste generator. One industry estimate projects that urban areas in China will generate some 490 million tons of municipal solid waste by 2030, up from 190 million tons in 2004.

"All of that means tremendous growth for Waste Management as it boosts its presence in China," says Leo Rishty, editor of the Unique Situations newsletter in Weston, Fla. Rishty focuses on underpriced companies that he believes have unappreciated potential catalysts that could propel their stocks to higher levels. He figures that in 12 months, Waste Management's stock will hit $45 to $50 a share.

Management wouldn't comment on the potential value of the company's China operations. Waste Management spokesman Jim Alderson says the company wouldn't be able to comment on it because it's in a so-called "quiet period" ahead of its next quarterly report on Feb. 17. But he notes that the company has emphasized previously that it "views China as really the market with the most growth opportunity for us."

Well-Defined Growth Prospects

Waste Management is focused on expanding its noncore operations, particularly its waste-to-energy business, notes David R. Cohen, analyst at investment research outfit Value Line. Apart from its acquisition in China, the company also plans to build three such facilities in Europe by the close of 2012, says Cohen.

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"This top-quality stock offers a dividend yield of 3.7%," he says, with its estimated cash flow of $1.2 billion expected to cover most of the elevated levels of dividends, acquisitions and share repurchases. Moreover, Waste Management has well-defined earnings growth prospects up to 2013-2015, notes Cohen.

Overall, management's growth initiatives include investing in waste-based energy production, recycling and new waste technologies, including up to $500 million a year for 10 years to improve the fuel efficiency of its plants.

"We view this as a positive long-term environmental strategy as more methane in landfills is converted into energy," says Stewart Scharf, analyst at Standard & Poor's, who rates Waste Management a buy. He expects the company's organic revenues to rise close to 5% in 2011, up from modest growth seen in 2010, thanks to increasing volume, higher commodity recycling prices, and rising landfill and collection-service prices. For 2011, Scharf expects Waste Management to earn $2.45 a share, up from an estimated $2.05 for 2010, and $2.01 in 2009.

Bill Gates Is a Believer

Wall Street has started to turn bullish on Waste Management, with six of 11 analysts who track it recommending buying the stock. The rest are still on the fence, rating it a hold. But some large institutional investors have taken stakes, including billionaire Bill Gates, whose William and Melinda Gates Foundation owns a 3.71% stake. Other big shareholders are Capital World Investors, the largest stakeholder with 8.8%, and Maori European Holdings with 6.8%.

For investors seeking to participate in the global growth of the rebounding solid-waste management industry, it wouldn't be a waste of investment capital to bet on Waste Management.

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