Waste Management's Earnings Win Shows That Its Strategy Is Paying Off
Waste Management reported its third-quarter results Tuesday, posting a nearly 30% jump in cash from operations. After adjusting for high restructuring costs and other one-off expensesin 2012, net income rose 7%, beating analyst estimates, and showed that management's long-term strategy is paying off. The company's multi-quarter restructuring effort is bearing fruit, resulting in a lower cost base and helping Waste Management execute more effectively on opportunities, and enforce price discipline.
Waste Management's restructuring effort is meant to streamline the organization's historically bloated middle-management bureaucracy, bringing key decision makers closer to ground operations while also bringing down an unnecessarily high cost structure. That initiative is working: with a flatter organizational structure, and more granular insight into local markets, Waste Management managed to raise core prices by nearly 4%, leading to revenue growth of 4.6%. At the same time, better control of costs allowed the overall operating margin to tick up a fifth of a percent.
The company is facing some headwinds. In recent years, Waste Management has expanded its green offerings, like recycling, salvaging commodities like metal and glass from the waste stream, and harvesting methane-rich gas from landfills as a clean energy source. While I believe these are good long-term investments in the company's future, they've all been drags on earnings. Costs have gone up in the company's recycling unit, largely due to China's "Green Fence" policy, which requires imported waste streams bound for recycling to be cleaner and better sorted than they used to be. Low commodity prices have caused revenue declines from the recycled materials that Waste Management sells, and low energy prices have pushed down prices for landfill-gas-powered electricity.
In the third-quarter earnings call, CEO David Steiner indicated that, in the short term, the company would pass on higher processing costs incurred by regulatory requirements, like the "Green Fence", to customers through fees. To guard against higher processing costs in the future, Waste Management will impose limits on how contaminated raw waste headed for the recycling business can be. Most Waste Management contracts are for three- to five-year terms; as contracts expire, the company can either sign more lucrative ones, or drop underperforming clients. Over time, then, the green business lines will become profitable either through higher revenue, or simple attrition.
Foolish bottom line
While I'm a happy Waste Management investor, the stock price has risen about 30% so far this year, and rising valuation measures indicate that the company is no longer the deep-value investment it once was. Income investors should still appreciate the stock, as it pays a 3.3% dividend yield. Also, 80% of earnings are paid out as a dividend, a high proportion, but certainly manageable. Strong competitive moats in its core collection markets protect earnings and dividend payments, and continued pricing discipline should drive earnings growth that, at a minimum, allows dividend payments to keep up with the cost of inflation. All in all, Waste Management is an exceptionally safe stock that, though its growth prospects are less certain, offers a very high and very reliable dividend.
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The article Waste Management's Earnings Win Shows That Its Strategy Is Paying Off originally appeared on Fool.com.Fool contributor Daniel Ferry owns shares of Waste Management. The Motley Fool recommends Waste Management. The Motley Fool owns shares of Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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