I am sharing something which i wrote for myself recently.

Please note, the description and operations are lifted verbatim from their website.

Waste Management $WM.

Description: Waste Management, Inc. is the leading provider of comprehensive waste and environmental services in North America. Headquartered in Houston, the company’s network of operations includes 431 collection operations, 381 transfer stations, 286 active landfill disposal sites, 17 waste-to-energy plants, 119 recycling plants and 90 beneficial-use landfill gas projects.

These assets enable Waste Management to offer a full range of environmental services to 22 million residential, industrial, municipal and commercial customers.

Their operations

1. COLLECTION. Waste Management provides solid waste collection services to millions of customers across North America, ranging in size from the single residential subscription to large national customers requiring comprehensive, one-source waste programs to serve hundreds of locations. With 25,000 collection and transfer vehicles, the company has the largest trucking fleet in the waste industry. The company uses advanced technology and disciplined programs to bring improved efficiency to the process of solid waste collection.
2. TRANSFER. With most of the waste collected by Waste Management going to its own landfills, a supporting network of transfer stations provides an important link for efficient disposal. Waste Management has 381 strategically located transfer stations to consolidate, compact and load waste from collection vehicles into long-haul trailers, barge containers and rail cars for transport to landfills.
3. DISPOSAL. Waste Management operates the largest network of landfills in its industry, with 286 active sites managing the disposal of more than 120 million tons of waste per year. The company operates its sites according to standards of safety and environmental compliance that go beyond regulatory requirements. Waste Management is focused on solutions that impact the future of solid waste management, including bioreactor technology, which accelerates the decomposition of organic waste through the managed introduction of air and liquids into the waste mass. Currently, the company is conducting research at 10 landfills to confirm the environmental benefits of bioreactor technology as an alternative method for managing landfill waste.
4. RECYCLING. As the largest recycler of municipal solid waste in North America, Waste Management handles more than eight million tons of recyclable materials each year, largely through its 119 recycling facilities. Through the resources of Recycle America Alliance, a majority-owned subsidiary, WM provides costefficient, environmentally sound recycling programs for municipalities, businesses and households across the U.S. and Canada.
5. LANDFILL GAS PROJECTS. For many years, Waste Management has worked with businesses, industries and public utilities across North America to develop beneficial-use projects from landfill gas. This gas is a reliable, renewable energy source that is produced naturally as waste decomposes in landfills. When collected, it can be used directly as medium Btu gas for industrial use or sold to gas-to-energy plants to fuel engine or turbine-driven generators that produce electricity. WM currently supplies landfill gas to 90 beneficial-use projects nationwide. The company’s 57 gas-to-electricity projects provide more than 260 megawatts of energy, enough to power 230,000 homes. The 33 projects that sell landfill gas as fuel to industrial users replace more than 2.6 million barrels of oil each year.
6. WASTE-TO-ENERGY. Waste Management’s Wheelabrator Technologies subsidiary pioneered the use of municipal solid waste for fuel in the generation of electrical power in the U.S. more than 25 years ago. Since then, the company has processed more than 117 million tons of municipal solid waste into energy, saving more than 180 million barrels of oil while generating nearly 64 billion kilowatt hours of electricity. Its 17 waste-to-energy plants have the capacity to process more than 24,200 tons of waste per day into electrical or steam energy. Together the plants generate an aggregate 690 megawatts of electric energy, enough to power 600,000 homes

A. SWOT 

1. Strength 

1.1 Strong Competitive Advantage

1.1.1 Regulations on Landfill licence.

WM and RSG and WCN control 80% of the landfill in north america. WM owns 5 out of the biggest 10 landfill in the US. Landfills are not easy to get approved for construction, mainly due to residential communities generally being averse to having them near their homes. This provides a significant "moat" against future competition in the landfill space. Many of Waste Management's collection competitors are forced to pay the company to use its landfills due to the lack of other options and the difficulty in constructing new landfills.

1.1.2 Scale of Vertical integration

The vertical integration model, where the company owns and operates its own landfills, transfer stations, and material recovery facilities (MRFs), Renewable natural gas extraction allows management to pull significantly more levers to drive results than smaller competitors. Margins are higher, and absorbing the large costs associated with the maintenance of all that infrastructure is dispersed across a much larger operation. 

ETC

1.1 Shareholder-friendly Management 

Growing dividend, and this has attracted quite a following among dividend investors The company is also increasingly buying back stock. In 1Q24, the company spent $250 million on buybacks, slightly less than the $300 million it spent on dividends. This dividend is protected by a low 40% payout ratio and comes with a history of 20 consecutive annual dividend hikes and a five-year CAGR of 8.4%. 

The CEO James C. Fish, owns ~172 thousand shares worth over $28 million. His 2022 compensation was $14.8 million, of which $8 million was in stock awards and $1.7 million in stock options. Mr. Fish has a tenure of 7.3 years. The CFO (Devina A. Rankin) also had over 50% of her compensation package rewarded in stock, and as of 2022, she owned 65.5k shares and 14k options, together worth over $13 million.

In the last five years, the share price has compounded at 13.91% a year excluding dividends ( Jun 10th 2019 closing price was 104.57, june 7th 2024 closing price is 200.55).

1.2 Management takes a long term view of then business, and has made acquisitions where it made sense.  

In 2020, WM acquired Advanced Disposal Services (ADS), a leader in in recycling and landfill gas-to-energy. 

In 2022, the company started to implement RNG (renewal natural gas) extraction from waste and by 2026 to have a 400m run rate ebitda from RNG. 

In 2024 June, WM announced that they are seeking to buy Stericyle for $7.2 billion. Stericycle is a leader in medical waste disposal.

1.3 The business is recession resistant but it is not immune. 

WM will be impacted in a recession as 70% of collections revenue come from their commercial and industrial customers. A slow down in the economy general means a slow down in economic activities and trash. This is especially true for housing starts, a slow down in construction sector will temporarily impact the business. It is resistant because the business is a recurring one, and most of the commercial agreements are signed for 3 to 5 years. 

The company was not immuned from short-term headwinds caused by the COVID-19 pandemic. The company resorted to flexible contract for commercial accounts during the crisis, and that smaller businesses got offered free service in the near term. However the dip lasted until April and the company’s SP ended 2020 higher than it started. 

In the 2022 decline of the general stock market, the share price dipped only 5.4% for the whole year from $166 to $157. 

1.4 Strong financials

In the last ten years, the company has had only 1 and 2 years where revenue and EPS werelower than the previous year. Their stated debt to ebitda ratio is 2.5 to 3. 

Their ROE and ROIC metrics have grown in the past five years, although it is still in the low teens, it is considered the best of class in this business.

2. Weaknesses 

2.1. Exposure to recycled prices.

WM was quite exposed to recycled prices in 2018, chinese recycled goods were dumped onto the US market and caused price volatility. WM then changed the pricing model to reduce its exposure by generating more revenue from the collection of recycling. So instead of an 0.20 EPS impact due to a 40% volatility, the impact is now just $0.06-0.08. 

2.2 This is a high Capex business. 

The CAPEX was supposed to go down after spending the elevated sum to build the RNG plants and reaping a 500m Ebitda run rate from this business by 2026. But with the acquisition of Stericycle, it looks like the company is heading into the Medical Waste business in a big way. And I don’t think capex as a % of revenue is going to drop too far from its current 10%. 

3. Opportunities 

(See Below for Catalysts and Drivers) 

4. Threats & Risks

The evolving nature of the business. For a boring utility-like nature of this business, it is quite dynamic.

The American waste management market is supposed to increase 5% CAGR from 2022 to 2027 or 5.6% CAGR between 2022 and 2030 depending on the research report. However, this doesn't mean that the solid waste volume will grow at 5% CAGR, the CEO made a remark recently:

“If you were to ask me what business do I want to be in right now, I want to be in a medical business of some kind because it's only getting bigger. And our business, by the way, solid waste, if I think about volume over the next decade is going to grow at probably 1% to 2%.”

June 7th, The Stifel 2024 Cross Sector Insight Conference

I think the company has to constantly think about growth and the company has to execute flawlessly. 

The latest news is that WM is seeking to divest in the RNG business, a business that was touted in 2022 as a strategic direction for the firm and a long term driver for growth. (I wont comment much about this development as it is just an exploration by the company, i suspect it has to do with trying to keep the debt to ebitda ratios between 2.5 - 3, the CFO has alluded that the acquisition of Stericycle might put them on a negative watch by S&P or Moody’s, so i think this is due diligence process)

B. Catalysts for unlocking value 

B.1. Continued Industry consolidation 

In the last 5 years, WM acquired about 90 companies. Last week, they announced their latest and largest acquisition, Stericycle. Stericycle is the largest provider of medical waste disposal and data destruction (primarily paper shredding) services in the United States. I think a lot of investors really dislike this deal and the WM’s SP was sold down when it was first announced. This is because the to-be acquired company has very meh metrics, like being GAAP unprofitable in 5 out of the last 10 years (They were FCF positive in all ten years though).

To quote WM’s CEO on the deal:

“So a lot of opportunity there. And then I look at the growth trajectory over a 10-year period. And the medical services business, and this is not us saying, this, this is a third-party saying this, is projected to grow at somewhere in the neighborhood of 5% to 6%. That's the volume side of medical services. Not a surprise to anybody in the room. The U.S. average American has aged 10 years in the last 40. We're getting older, and the replacement rate is like 1.7% or 1.7% right now. So we're not replacing, we're getting older. If you were to ask me what business do I want to be in right now, I want to be in a medical business of some kind because it's only getting bigger. And our business, by the way, solid waste, if I think about volume over the next decade is going to grow at probably 1% to 2%.“

B.2 Renewable Natural Gas from garbage dumps 

To quote this 2022 WSJ article: WM is spending $825 to build 17 new plants to convert methane from garbage dumps into biomethane. “ The company also intends to sell the gas to utilities, industrial firms, and organizations seeking to enhance their environmental credentials.” The company hopes these investments to result in $500 million of run-rate EBITDA per year totaling 21 million MMBtu per year by 2026.

C. Valuation

An interesting topic always. I scoured the SA archives, out of the 86 articles written on WM (last article in 2019 to current June 7 2024), there were 47 articles that said that WM was too expensive to buy and investors would not beat the market if they bought WM at such high earnings multiple, 29 articles gave WM a buy rating and 10 articles were neutral.

Can you imagine, the naysayers, the fence-sitters who for 5 years said “NO” and then watched the share-price battle covid, lockdown, war in ukraine, inflation, the great crash of 2022, and fear of recession in 2023 and then almost doubled by 2024 and beating the S&P 500 in the process, with an annualised 13.91% returns vs the 13.12% CAGR for the S&P 500.

If i were to use SA as an reverse indicator, then i should be bearish because most of articles in 2024 turned positive even though the share-price is at an all time high, and Q1 results were okay although revenue was little light. Many of the Dividend growth-focused SA authors switched from negative to positive towards WM in 2024. 

If I were to look at valuation from my own calculations (please refer to the tearsheet): 

My blended calculation puts the fair value around 151 to 164 against the current price of $200 

If i were to use the analysts estimates, and then work backwards to to match the current price, this implied growth rates works out to around 12%, which is at the edge of what they used to achieve in the past. In my opinion, this 12% growth rate is a bit optimistic and the company must execute it flawlessly. For my blended calculator, i used 9% as a more realistic long term growth-rate. 

** I forgot to add this:

1. Bill and Melinda Gates foundation are large investors in WM.
2. Bill is also an investor in WM largest competitor RSG.
3. Tearsheet: https://docs.google.com/spreadsheets/d/15qwGjsW6yMPTPIl9e_FwdQ-bV4WNVquXW5ZS3Ilwolw/edit?gid=1821913631#gid=1821913631