Waste Management Inc. (WM) delivered adjusted earnings per share (EPS) of 55 cents in its third quarter ended September 30, 2010, falling short of the Zacks Consensus Estimate of 59 cents. EPS in the quarter however posted a 2% increase from 54 cents in the year-ago quarter. The year-over-year improvement was driven by growth in its collection, landfill and recycling businesses and disciplined focus on pricing.
The company stated that two items had a 5-cent impact on EPS in the quarter – unexpected maintenance and other costs of 2 cents per share at its Wheelabrator operations and a 3-cent effect from its growth initiatives. The latter pertained to its new Bagster product offering and initiatives in medical waste, which are in the start-up phase leading to start-up costs, such as advertising and new sales personnel.
The EPS of 55 cents, however, excluded the net effect of 4 cents pertaining to tax adjustments, closure costs at three sites and changes in the risk-free interest rate. EPS in the year-ago quarter excluded a net benefit of 2 cents from favorable tax adjustments and restructuring charges. Netting these, EPS in the reported quarter stood at 51 cents compared with 56 cents in the year-ago quarter.
Waste Management’s revenues of $3.23 billion however, were in line with the Zacks Consensus Estimate. Lower Volumes had a negative impact of 0.7% on the company’s internal revenue growth in the quarter, while yield on the collection and disposal business contributed 2.3% to internal growth. However, on a positive note, the quarter marked the fourth consecutive quarter in which volume declines moderated.
Collection revenue was $2.1 billion, up 5%, Landfill was $674 million, up 2%, Wheelabrator, the company’s waste-to-energy operational segment, delivered $237 million in revenue, up 9% y/y and Recycling & Other revenue of $286 million reflected a 2% increase. Transfer revenues however posted a decline of 3% to $342 million in the quarter.
Cost & Margin Performance
Operating expenses increased 7% to $1.99 billion year over year (excluding Closed site charges and changes in risk-free interest rate) primarily from $67 million of increased cost of goods sold related to recycling commodity rebates, $37 million of increased subcontractor costs associated with the clean-up along the Gulf Coast, $18 million of increased maintenance and other costs at Wheelabrator waste-to-energy plants and $12 million for increased diesel fuel prices.
Selling, general and administrative expenses increased 9% to $369 million driven by the company’s strategic growth initiatives and information technology upgrades. However, as a percentage of revenue it remained unchanged at 11%.
Adjusted operating profit went up 7% to $562 million and adjusted operating margin remained flat at 17.4%.
Financial Position
Waste Management had cash and cash equivalents of $550 million as of September 30, 2010, substantially down from $1,169 million as of June 30 2010. The company generated cash flow from operations of $677 million compared with $575 million in the year-ago quarter. Free cash flow was $424 million in the quarter compared with $343 million in the year-ago quarter.
Waste Management returned $306 million to shareholders, consisting of $149 million in dividends and $157 million in common stock repurchases. In addition, it completed $122 million of tuck-in and other acquisitions.
As of September 30, 2010, the debt-to-capitalization ratio improved to 59% compared with 61% as of June 30, 2010.
Outlook
Based on expectations of an improvement in collection and disposal volumes, pricing trends, benefits from cost control efforts, Waste Management expects continuing improvements in the fourth quarter of fiscal 2010. The company projects the fourth quarter EPS to range between 54 and 56 cents.
The company targets free cash flow in the range of $1.2 billion to $1.3 billion for the year.
Our Take
The company continues to drive profits by focusing on its pricing programs and cost reductions. Its leading market position enables it to hold onto its pricing power. Moreover, the company is expanding its service offerings and strengthening its market presence through acquisitions.
The company continues to be plagued by lower volumes. Though the company said that volumes are stabilizing, we still see weakness in the market. Given the uncertain economic conditions, we believe it will be more than a couple of quarters before the company sees a substantial improvement in its volumes. We currently have a Zacks #4 Rank (short-term Sell recommendation) on the stock.
Houston, Texas-based Waste Management is the largest provider of comprehensive waste management services in North America. The company provides collection, transfer, recycling and resource recovery, and disposal services to nearly 20 million residential, commercial, industrial and municipal customers. It is also a leading developer, operator and owner of waste-to-energy and landfill gas-to-energy facilities in the U.S.
WASTE MGMT-NEW (WM): Free Stock Analysis Report
Zacks Investment Research
