Garbage Stocks: No Stinkers Here
Even in a recession, these two companies will continue to pick up trash and profit.
It's a messy business, but somebody's got to do it. Indeed, somebody has to haul your trash come rain, shine or recession. And two such trash haulers -- Waste Management and Allied Waste -- are an investor's treasure.
The stocks have been beaten down since last summer on concerns over a decline in construction and construction-related waste. Waste Management (symbol WMI) is off 16% from its July high of $39. Allied Waste (AW) is down 29% from its June high of $14. But residential and non-residential construction combined account for only 15% of the total market for waste collection and processing, with the rest coming from routine residential and commercial collection. And "collection doesn't go away in a recession,' says Friedman, Billings, Ramsey analyst Brian Butler.
Handling 40 % to 45% of U.S. garbage disposal, Waste Management is "the 800-pound gorilla in the market," Butler says. The company has a market capitalization of $16 billion and reported profits of $1 billion in 2007, up 7% from 2006.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Waste Management derives much of its heft from its landfill network, which is the largest in the business. The company's nearly 300 landfills and incinerators handle 125 million tons of garbage each year. Its 131 recycling facilities process 6 million tons of recyclables per year.
That network endows Waste Management with price-setting powers. It can set disposal fees for other trash collectors that need to use its landfills, and it leads the pack for setting prices for collection customers. The company's operations are well diversified across the country -- a boon if a recession is confined to certain areas.
Until a few years ago, the main players had been duking it out in price battles for market share. But when CEO David Steiner took over Waste Management in 2004, he began raising prices and the rest of the industry followed suit.
Waste Management, however, has been scraping the muck off its own name over the last several years. In 2001 the company paid several hundred million dollars to settle the largest pre-Enron accounting scandal, for allegedly cooking its books in the mid-90s and breaking securities laws during a 1998 merger.
So far the company hasn't seen significant declines in volume resulting from the slowdown in construction. Volumes fell 5% in the fourth quarter of 2007, but the company says at least 50% of that was due to increased prices pushing out less-profitable customers. The company is anticipating a further 2.5% to 3% drop in volumes in 2008.
The stock, which closed at $33 March 11, trades for 15 times the average analyst estimate of 2008 earnings per share of $2.22. Butler rates the stock "outperform" and gives it a 12-month price target of $47.
The next largest player is Allied Waste, which own 161 landfills that process 70 million to 80 million tons of garbage per year. The company is also well diversified, operating in 37 states and Puerto Rico.
Allied jumped on the price-hike bandwagon later than competitors and, therefore, has more room for hikes in 2008 than its peers, Butler says. Allied raised prices by 6% in 2007 and anticipates another 5% increase in 2008.
The company has been aggressively raising cash to pay down debt in recent years. At almost $500 million in 2007, free cash flow has more than quadrupled over the past two years.
The stock, which closed at $10 March 11, trades for 11 times the average analyst estimate of $0.91 earnings per share in 2008. Butler rates the stock "outperform" and gives it a 12-month price target of $18.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
What To Look for in Great Dividend Stocks
Dividend-paying stocks have lagged lately but are due for a comeback. Here's what to look for in great dividend stocks.
By Kim Clark Published
-
How to Retire Early by 40: Build the FIRE Now
It's not easy, but you may be able to retire by 40 or 45 if you take these FIRE (Financial Independence, Retire Early) steps now.
By Jacob Schroeder Published
-
Stock Market Today: Markets Soar Amid Strong Earnings for Big Tech
Equities ended the week on an up note thanks to some of the market's biggest names.
By Dan Burrows Published
-
Stock Market Today: Markets Tumble Amid Slower Economic Growth and Rising Prices
Disappointing readings on GDP and inflation helped tank equities.
By Dan Burrows Published
-
Stock Market Today: Stocks Run Out of Steam Ahead of Meta Earnings
The Dow Jones Industrial Average snapped a four-day winning streak after Boeing's first-quarter results.
By Karee Venema Published
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
Stock Market Today: Markets Rebound Ahead of Big Week for Earnings
Equities rallied on easing geopolitical tensions, upcoming quarterly results.
By Dan Burrows Published
-
Stock Market Today: Nasdaq Spirals as Netflix Nosedives
A big earnings boom for credit card giant American Express helped the Dow notch another win.
By Karee Venema Published
-
Stock Market Today: S&P 500, Nasdaq Extend Losing Streaks
The two indexes have closed lower for five straight sessions.
By Karee Venema Published
-
Stock Market Today: Dow Slips After Travelers' Earnings Miss
The property and casualty insurer posted a bottom-line miss as catastrophe losses spiked.
By Karee Venema Published