Golden Garbage Turns Green (WMI)

As the population and business keeps growing, more and more garbage is produced.  Waste Management Incorporated has just posted a record earnings report and with the recent adoption of the “Think Green” ethos, Waste Management Inc could be in store for much much more…

The Earnings are Anything but Garbage

Waste Management Inc reported a net income of $276 million, or $0.54 per share in the 4th quarter of 2007, beating analyst estimates of $0.51 per share and pounding last year’s 4th quarter performance by 14.9%.

Total revenues grew by 2.4% in 2007.  Earnings per share for year were $2.23 compared to $2.10 per share in 2006.  It’s hard to argue with the numbers – Waste Management Inc is growing and at a steady rate to boot.

WMI’s stock price jumped 2.75% on Wednesday, solely on the surprise earnings news.  This in addition to the current dividend payout of 2.8% a share, or $0.96 per year, makes Waste Management Inc both an attractive value play. I divided the yearly dividend by the Wednesday closing price of $34.04 to come up with the 2.8% percentage payout rate – I also retrieved the 2.75% price increase from MSN)

Think Green

Since Waste Management Inc was involved in a shady accounting scandal with Arthur Anderson in 1998, where the company inflated the depreciation time for many of its hard assets in order to give the appearance of higher after-tax profits, WMI went on a public relations bender and adopted the “green” mind set.

Over the last decade Waste Management Inc has developed the technology to profit from the following three environmentally friendly energy conversion practices:

• Convert landfill gas to energy.  By controlling nearly 300 landfills throughout the United States, WMI has access to a large supply of methane.  This gas can be easily collected and used directly for industrial energy purposes or to fuel engine/turbine driven generators of electricity.

• Covert physical waste to energy.  Through WMI’s subsidiary, Wheelabrator Technologies, it uses actual trash as fuel to generate electrical power through its 17 waste-to-energy plants – which all together can process up to 24,000 tons of trash per day.  The conversion of trash to energy not only cuts down on the amount of landfill waste, but also provides an alternative energy source to fossil fuels.

• In 2006, through WMI’s subsidiary, WM Recycle America, it processed roughly 5.5 million tons of residential recyclables and provided enough energy to power about 850,000 homes. It also recycled enough paper to save 41 million trees in 2006.

Waste Management Inc is keeping the environment in mind.  There has been a large shift towards environmentally friendly business since the 1990’s – the hybrid car is a good example.  People are starting to realize that business has taken a heavy toll on the Earth and that it’s time to start treating our planet with more respect.

By adopting the aforementioned “green” energy producing practices, Waste Management Inc is developing the necessary skills to one day compete in the ever-growing energy market through the ever-present waste industry. 

The Bottom Line

With a stronghold on the garbage industry – a business that will never die – Waste Management Inc is going to be profitable for many years to come.  Unless, that is, someone develops a household appliance that turns all of one’s trash into energy – however, I doubt that will happen anytime in the near future.

With a strong dividend, which is going to be increased by 12.5% in 2008, Waste Management Inc looks to be a solid value play with a good growth potential in the long term.

Let’s also not forget about the “Think Green” – a series of environmentally friendly waste-to-energy conversion programs.  This should one day provide Waste Management Inc with a foot hold in the consumer energy market – which could prove to be extremely profitable.

Cheers,

Jack Aubrey
Senior Equity Analyst, Bourbon & Bayonets