Turning Trash into Treasure (Part 2)

Ian

Published in

The Peanut

5 min readFeb 11, 2019

A case study of Waste Management, Inc.

Somebody’s trash is someone else’s treasure

Business Model

Waste Management is currently the largest non-hazardous waste operator in North America with more than 21 million customers across 48 states and Canada. The company runs 400 collection operations, 249 active solid waste landfills, 297 transfer stations, and 104 recycling centers.

Their business model can be described by the classic phrase of turning trash into treasure. In the garbage collection business, it is usual practice where clients set up long-term contracts with the collection firm. The contract usually last 3–7 years for residential clients and the fees are generally paid by the municipalities or the homeowner depends on the region. On the other hand, industrial clients usually sign 3 year contracts and operate on a larger scale. The basic operations for Waste Management Inc is to supply large dumpsters for businesses to use and they will collect them periodically with one truck and on operator.

WM’s most profitable business is landfill and the transfer business comes in at a close second. The transfer business is basically utilising a collecting site where the hurdlers of the waste will stop if there are no garbage disposal sites close by. The waste will be sorted in the transfer site. In addition, there are also third party hurlers using stations to dump the waste where WM charges a fee for temporarily storing their collected waste. Lastly, their business also handles recycling taking 8% of the total revenue; especially when they first introduced residential single-stream recycling, a large increase in volume have been shown since.

Competitive Environment

The waste management industry is highly competitive with only a few key factors to determine the returns of the business. The two key drivers are population and urban construction. Firstly, the increase in population in urbanised areas result in the increase in waste, and waste means business for WM. Secondly, constructing new projects create construction debris and demolition wastes, which can all be profitable businesses for WM. This leads to the seasonal effects of the industry on WM. It can be seen that the earnings have dropped slightly as winter season in North America have slow downed due to it being the dry season for construction.

Despite being highly dependent on only a few key drivers, WM can turn this into a positive note where fewer drivers means the forecasting of future returns will be more concrete and accurate. Thus, providing a higher assurance for individuals making investment decisions or the firm to plan other methods of operations during dry seasons of construction.

Government also plays a key role in the industry of waste management. Garbage does not look good for a city, so new bills to clean up the streets could mean a significant increase in operations for WM. In addition, construction projects and other Government projects could mean potential businesses.

The recycling businesses is often determined by the commodity prices. The recycled materials is sold back on a market and it is usually quite volatile. It is usually a tough businesses, but with the improved strategies and technology, WM still manages to profit off the recycling business.

Financials

WM has a great 1-year return this year with a positive and strong Earnings per share. Their revenue have increased alongside their net income since 2015; showing strong signs for current and future operations. The main source of cashflow comes from their operations with strong signs showing their investments in 2016 on green technology have starting to perform on their businesses. Their strong cash flow will allow them to undertake some new operations in the future while sustaining current operations. The 5 year stock price is just another indicator on why WM’s business model is undisputed one of the greatest.

In 2018 alone, WM had a 8% EPIDA growth on a 2% economy, which is pretty incredible. They have also signed large contracts in New York and Los Angeles worth over $1 Billion dollars each. Their new strategy dealing with recycling have also proof that recycling isn’t tough businesses when WM is around.

Competitive advantage

Vertical integration plays a major role in many businesses; it integrates stages of production into one firm where it is usually operated by two or more firms. WM is 66% integrated, which means they can use the cost-saving advantages brought forward from vertical integration. In addition, WM is under-leveraged compare to its major competitors. Thus, they are holding liquid assets that can be used to invest in new technologies in the future. Lastly, by looking at the firm’s financial performance in the last few years, it is no doubt that the management have made great strategic decisions, and they can still be trusted and accountable for generating success in the future.

Risks

Working with governments always have a risk of not meeting the large demands. Especially in such a competitive industry, keeping a certain standards is a must if you want thirsty competitors to stay out of the way. There is also an increased regulations on commodity pricing, which could ultimately affect their recycling business.

To conclude,

If you have the money, buy WM stocks right now. There are also rumours regarding WM’s plan to increase Dividend Payouts. I am mostly impressed by the WM’s management and its strategic decision making to keep them profitable during the worst times of the Economy. Despite it being in such a competitive industry, I believe there are no near second competitors in the short term that have the resources to outperform WM.

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Source: Dan Glucksman & Mark Kugler, 2/8/2018