Shares of Waste Management (WM) jumped 0.2 % during today's morning session, bringing their 52 week performance to 4.0%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's strong growth indicators and mixed market sentiment.
Waste Management, Inc., through its subsidiaries, engages in the provision of environmental solutions to residential, commercial, industrial, and municipal customers in the United States and Canada. The large-cap Utilities company is based in Houston, United States and has 49,500 full time employees.
WM Has a Higher P/E Ratio Than the Sector Average
Compared to the Utilities sector's average of 22.89, Waste Management has a trailing twelve month price to earnings (P/E) ratio of 30.8 and an expected P/E ratio of 24.7. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $5.38 or forward earnings per share of $6.71.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Waste Management's P/E ratio is higher than its sector average of 22.89, we can deduce that the market is overvaluing the company's earnings.
Waste Management Is Overvalued in Terms of Expected Growth
Waste Management's PEG ratio is 3.11. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Waste Management's case, it tells us the company is overvalued.
WM Has an Alarming P/B Ratio
The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.
Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Waste Management's P/B ratio of 9.9 is higher than its sector average of 1.03, such a margin of safety does not exist for the stock.
WM Is Generating Cash
Waste Management has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 4.0%, compared to 9.2% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of -1.3% and a coefficient of variability of 13.7%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | FreeCashFlow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 4,536,000 | -2,587,000 | 1,949,000 | -19.93 |
| 2021-12-31 | 4,338,000 | -1,904,000 | 2,434,000 | 37.44 |
| 2020-12-31 | 3,403,000 | -1,632,000 | 1,771,000 | -13.86 |
| 2019-12-31 | 3,874,000 | -1,818,000 | 2,056,000 | n/a |
Waste Management's Margins Are Strong
If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Waste Management's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.
Waste Management's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 19,698,000 | 12,294,000 | 37.59 | -1.16 |
| 2021-12-31 | 17,931,000 | 11,111,000 | 38.03 | -1.53 |
| 2020-12-31 | 15,218,000 | 9,341,000 | 38.62 | 0.16 |
| 2019-12-31 | 15,455,000 | 9,496,000 | 38.56 | n/a |
Waste Management's Operating Margins
| Date Reported | TotalRevenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 19,698,000 | 3,976,000 | 17.4 | 5.52 |
| 2021-12-31 | 17,931,000 | 3,863,000 | 16.49 | 1.29 |
| 2020-12-31 | 15,218,000 | 3,399,000 | 16.28 | -8.64 |
| 2019-12-31 | 15,455,000 | 3,205,000 | 17.82 | n/a |
Waste Management's cost of revenue is growing at a rate of 6.7% in contrast to 5.5% for operating expenses. Sales revenues, on the other hand, have experienced a 6.3% growth rate. As a result, the average gross margins growth is -0.6 and the average operating margins growth rate is -0.6, with coefficients of variability of 1.3% and 4.3% respectively.
Waste Management Benefits From Positive Market Signals
The market sentiment regarding Waste Management is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $200.0 to $151.0. WM is trading -3.63% away from its target price of $172.12. 1.1% of the company's shares are tied to short positions, and 83.3% of the shares are held by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2022-12-31 | Vanguard Group, Inc. (The) | 9% | 37,490,065 | $6,218,289,837 |
| 2022-12-31 | Bill & Melinda Gates Foundation Trust | 9% | 35,234,344 | $5,844,144,661 |
| 2022-12-31 | Blackrock Inc. | 7% | 30,412,614 | $5,044,388,388 |
| 2022-12-31 | State Street Corporation | 5% | 18,538,068 | $3,074,816,750 |
| 2022-12-31 | Morgan Stanley | 2% | 7,370,481 | $1,222,504,871 |
| 2022-12-31 | Geode Capital Management, LLC | 2% | 7,024,158 | $1,165,062,005 |
| 2022-12-31 | Pictet Asset Management SA | 1% | 5,705,910 | $946,410,793 |
| 2022-12-31 | Ameriprise Financial, Inc. | 1% | 5,683,821 | $942,747,001 |
| 2022-12-31 | Nordea Investment Management AB | 1% | 5,439,931 | $902,294,185 |
| 2022-12-31 | Lazard Asset Management LLC | 1% | 5,112,019 | $847,905,059 |
