Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable, market-beating gains with improving financial metrics that support strong price growth. Let's take a look at what Waste Management's (NYS: WM) recent results tell us about its potential for future gains.
What the numbers tell you
The graphs you're about to see tell Waste Management's story, and we'll be evaluating that story in several ways.
Growth is important on both the top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always be reported at a steady rate, we'll also look at how much Waste Management's free cash flow has grown in comparison to its net income.
A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Waste Management's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.
Is Waste Management managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it is to earn our approval.
Healthy dividends are always welcome, so we'll also make sure that Waste Management's dividend payouts are increasing -- but at a level that can be sustained by its free cash flow.
By the numbers
Now let's take a look at Waste Management's key statistics:
Pass or Fail
Revenue growth > 30%
Improving profit margin
Free cash-flow growth > net income growth
(9.7%) vs. (1.4%)
Improving earnings per share
Stock growth +15% < EPS Growth
29.1% vs. 4.8%
Source: YCharts. *Period begins at end of Q2 2009.
Improving return on equity
Declining debt to equity
Dividend growth > 25%
Free-cash-flow payout ratio < 50%
Source: YCharts. *Period begins at end of Q2 2009.
How we got here and where we're going
Wow. Despite being a Fool favorite, Waste Management earns one of the lowest possible scores, falling short of a passing grade on nearly every metric except improving EPS. Why is that?
The trash hauler's second-quarter earnings report was a disappointment on multiple fronts. Its declining profit is just part of a larger grab bag of bad news that includes workforce reductions, strikes, and the threat of fines over said strikes. Waste Management may be doing good by improving its sustainability practices, but that means nothing to shareholders if it causes the bottom line to shrink.
Waste Management doesn't have a lot of competitors, but as my fellow Fool Sean Williams notes, those few competitors are becoming fewer (and larger) through an inevitable industry consolidation. Republic Services (NYS: RSG) got to second place through acquisitions, and Waste Connections (NYS: WCN) is wasting no time scooping up smaller waste-management concerns, having bought an Alaskan company earlier this year and oil and gas specialist R360 Environmental Solutions last month. The competition is so intense in the United States that international waste and water utility Veolia Environnement (NYS: VE) simply sold off its American trash assets in the corporate equivalent of waving the white flag.
Waste Management's attempting to reduce its substantial fueling expenses by converting to natural gas through a partnership with Clean Energy Fuels (NAS: CLNE) , but that's just one piece of the puzzle. Waste Management isn't likely to go belly-up any time soon, and shareholders should cheer efforts to improve profitability through reduced costs, but as you can see from the graphs and tables above, it hasn't managed to do so in any way other than through reduced share counts. This company may offer an attractive dividend, but without the business (and stock price) growth behind it, Waste Management seems like an inferior option in a big field of stocks that pay you back.
Putting the pieces together
Today, Waste Management has few of the qualities that make a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
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The article Is Waste Management Destined for Greatness? originally appeared on Fool.com.
Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.The Motley Fool owns shares of Clean Energy Fuels and Waste Management. Motley Fool newsletter services have recommended buying shares of Republic Services, Waste Management, Clean Energy Fuels, and Veolia Environnement. Motley Fool newsletter services have recommended creating a write covered strangle position in Waste Management. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.