Waste Management: Trash to Treasure

If it's a dirty job, Waste Management (symbol WMI) wants to do it. Whether it's taking out the trash at the end of your driveway or disposing of a barrel of toxic waste from the local chemical plant, the Houston-based company is up to the task. Fortunately, as the economy grows, so does its garbage. "The solid waste industry is in the early stage of an improving industry cycle, highlighted by some of the best fundamental business conditions seen in the past five years," says Michael Hoffman, an analyst with investment bank Friedman Billings Ramsey.

The bad news for you is that your garbage bills are probably going up, and there's little your neighborhood association can do about it. Trash collectors, led by Waste Management, have been raising prices for their services since last year. "Garbage companies have only seen minimal resistance to price increases," says Merrill Lynch analyst Lorraine Maikis. And there's no sign of relief for the disgruntled bill-payers. Hoffman expects price hikes to continue until 2008.

But higher trash-collection fees can only last for so long. Unlike some garbage companies, Waste Management has diversified into the energy business. It operates 17 waste-to-energy plants in California, Florida and Washington, and in Northeast states through the company's Wheelabrator subsidiary. The facilities burn solid waste at high temperatures in boilers that produce steam to generate electricity. They can incinerate up to 24,000 tons of solid waste a day. Energy revenue grew 5%, to $879 million, in 2005, which was a higher revenue growth rate than the 4.2% for the rest of the company last year.

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Trash isn't the only thing burning brightly at Waste Management. The company reported earnings of $1.2 billion last year, or $2.09 per share, up from $939 million, or $1.60 per share, in 2004. Shares recently traded at $35, or 21 times the $1.67 per share analysts expect the company to earn for this year. Maikis says the stock's valuation is "unwarranted given its industry-leading position, attractive landfill assets and cash generation." She and Hoffman both think the stock is worth $40 a share.

--Thomas M. Anderson