Waste Management Inc. Annual Valuation – 2014 $WM

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Waste Management (WM) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Waste Management, Inc. (WM) is a provider of waste management services in North America. WM’s subsidiaries provide collection, transfer, recycling, and disposal services. WM is a developer, operator and owner of waste-to-energy and landfill gas-to-energy facilities in the United States. Its customers include residential, commercial, industrial and municipal customers throughout North America. Its segments include Eastern, Midwest, Southern, Western and Wheelabrator Groups. The Oakleaf operations are included in other. The services the Company provides include collection, landfill, transfer, waste-to-energy facilities and independent power production plants, recycling and other services. In January 2013, its subsidiary, WM Recycle America, L.L.C., acquired Greenstar, LLC. Effective August 1, 2013, Waste Management Inc acquired Summit Energy Services, and concurrently, WM acquired Liquid Logistics. Effective August 1, 2013, Waste Management Inc acquired Oak Grove Disposal Co. WM Chart

WM data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary

Key Data:

Recent Price $44.77
MG Value $2.07
MG Opinion Overvalued
Value Based on 3% Growth $22.84
Value Based on 0% Growth $13.39
Market Implied Growth Rate 9.96%
Net Current Asset Value (NCAV) -$30.45
PEmg 28.42
Current Ratio 0.76
PB Ratio 3.63

Balance Sheet – 3/31/2014

Current Assets $2,535,000,000
Current Liabilities $3,357,000,000
Total Debt $8,978,000,000
Total Assets $22,442,000,000
Intangible Assets $6,571,000,000
Total Liabilities $16,705,000,000
Outstanding Shares 465,300,000

Earnings Per Share

2014 (estimate) $2.29
2013 $0.21
2012 $1.76
2011 $2.04
2010 $1.98
2009 $2.01
2008 $2.19
2007 $2.23
2006 $2.10
2005 $2.09
2004 $1.60

Earnings Per Share – ModernGraham

2014 (estimate) $1.58
2013 $1.35
2012 $1.94
2011 $2.05
2010 $2.07
2009 $2.12

Dividend History
WM Dividend Chart

WM Dividend data by YCharts


Waste Management does not qualify for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns with the level of debt relative to the current assets and the lack of earnings growth over the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. From a valuation side of things, the company appears significantly overvalued after seeing its EPSmg (normalized earnings) drop from $2.07 in 2010 to only $1.58 for 2014. This demonstrated drop in earnings definitely does not support the market’s implied estimate of 9.96% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Waste Management (WM)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Waste Management (WM) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.






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