CWST Casella Waste Systems Inc

We maintain our Neutral recommendation on Waste Management Inc. (WM). The company is the largest provider of comprehensive waste management services in North America.

Waste Management recorded a 5% rise in earnings per share to 63 cents on the back of a 7% increase in revenues to $3.4 billion in the fourth quarter of 2011. Both the figures outperformed the respective Zacks Consensus Estimates.

Waste Management’s recent acquisition of Oakleaf Global Holdings will provide North American customers with unprecedented access to waste and recycling solutions by pairing the largest network of directly owned hauling, recycling, diversion and disposal assets with the largest managed third-party network. The Oakleaf integration is on track and benefits are targeted by the second half of 2012. Subsequent to the completion of integration, the company expects to generate a minimum of $80 million in EBITDA on an annualized basis.

2011 marked the ninth consecutive year of a quarterly dividend hike. The dividend has grown from 1 cent a share in 2003 to $1.42 in 2011. The current dividend yield came in at 4.1%. In 2012, Waste Management plans to return up to $1.2 billion to its shareholders through a combination of dividends and share repurchases. Backed by its strong cash flow, Waste Management is expected to announce yet another dividend hike this year. The board has also authorized up to $500 million in share repurchases.

Waste Management’s cost cutting efforts helped the company to maintain its profits despite weaker volumes. Cost cuts for the year were attained through better supply chain management. These savings are expected to accelerate in 2012. Furthermore, the company will resort to additional cost reductions such as improvement in delivery of services in the field through more efficient routes, reduced unproductive time, and better customer support with greater use of onboard computing technology and reengineering field processes. We believe cost-saving and efficiency initiatives should continue to benefit the bottom line in 2012 and thereafter.

Waste Management has nevertheless recorded declines in volumes in the recent past due to the overall macro weakness, pricing pressure from competition, and a reduction on part of clients to reduce their waste. Though still declining, the year 2011 saw some recovery in output. Each of the collection and municipal solid waste landfill lines of business has improved sequentially for three consecutive quarters. The company also continues to benefit from strong growth in special waste and recycling commodity volumes. Based on the improving trend, management’s guidance assumes flat to slightly positive volume growth for 2012.

As a caveat, the first quarter is seasonally weak for Waste Management. As municipalities look to cut expenses in the face of budget shortfalls, Waste Management would be compelled to roll back some price increases in order to retain municipal contracts in the first half of fiscal 2012.  Besides, the integration of Oakleaf will dilute earnings in the first half of the year with benefits beginning to accrue latter in the year.

Waste Management’s recycling operations process for sale certain recyclable materials, including fibers, aluminum and glass, all of which are subject to significant market price fluctuations. For the first nine months of 2011, overall commodity prices increased approximately 26% year over year. However, during the fourth quarter of 2011, the company witnessed a decline in commodity prices of approximately 8% due to increased supply and lower demand. Waste Management may face significant headwinds if such a trend continues.

During 2011, approximately 54% of the electricity revenue at Waste Management’s waste-to-energy facilities was subject to current market rates. The company estimates that nearly 56% of its electricity revenue at its waste-to-energy facilities will be at market rates by the end of 2012. The company’s exposure to market price volatility has increased over the last few years as long-term power purchase agreements have expired. Electricity prices have remained stubbornly low and are expected to be at low levels in the first half of 2012 as well.

To sum up, we maintain our Neutral recommendation on Waste Management, with the rewards balancing out the risks. We intend to hold a more positive stance when Waste Management’s cost cutting and growth initiatives bear fruit. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

Waste Management is the largest provider of comprehensive waste management services in North America. The company provides collection, transfer, recycling and resource recovery, as well as disposal services to nearly 20 million residential, commercial, industrial and municipal customers. It competes with Republic Services, Inc. (RSG) and Casella Waste Systems Inc. (CWST).

 
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