Waste Management, is Garbage the Ultimate Value Investment?

Value Investment 101 teaches us to look for companies that are unsexy, unglamorous, and unattractive but making money. The thinking is that the factors that make those organizations unattractive, keep their stock price undervalued.

Nothing is less attractive; or less sexy than garbage, which got me thinking about Waste Management (NYSE: WMT). Its’ business is garbage disposal which is about the least glamorous enterprise in existence. After all, there is nothing appealing about some working stiff driving around town in a big, dirty, truck emptying dumpsters all day.

More importantly, garbage is something we all produce and despite the best efforts of the environmental movement, something we keep producing more of. Hauling away the trash is a problem we all face, and have to pay for sooner or later.

Does Waste Management Make Money?

Okay, the elevator pitch for Waste Management sounds good, but does it make money? Yes, it does, but it has a hard time keeping that money.

Waste Management reported a 10.39% profit margin and a $1.381 billion net income on $14.29 billion in revenues on 30, September 2017. Not bad, considering today’s economy.

There’s also a considerable capacity for growth at Waste Management; its’ revenues grew from $13.39 billion in September 2016, to $14.29 billion in September 2017. The income also grew from $1.28 billion in September 2016 to $1.381 billion September 2017.

The shortcoming at Waste Management is that the company has a hard time keeping its money. Its’ cash and short-term investments were just $35 million on September 30, 2017, which indicates no float or extra cash generated by the business.

That was despite $3.093 billion in cash from operations on 30 September 2017. Interestingly enough, Waste Management’s cash from operations is growing; it reported $2.778 billion in cash from operations in September 2016. There was also a free cash flow of $506 million in September 2017, which was up from $425 million in September 2016.

Can Waste Management Make Money

The reason Waste Management has trouble keeping money is obvious: high operating costs. Trash trucks cost a lot of money, a brand new 2018 Peterbilt garbage truck costs $245,000, according to Trash Trucks Online.

Beyond that, there’s maintenance, fuel, operating expenses, and pay and benefits for the truck drivers many of whom are unionized. Other expenses include dumping fees for all that garbage and the cost of operating hundreds of garages for big trucks. Another vast expense is the cost of all those dumpsters and trucks to haul them around town.

Repair costs are also vast; garbage trucks are complex and sophisticated pieces of machinery, with all sorts of complicated systems that will break down sooner or later. That necessitates fully-equipped garages and highly-paid mechanics as well as towing.

Threats to Waste Management

Some high future costs are on the horizon for Waste Management including forced electrification of its trucks. European cities are already banning diesel-powered vehicles, a trend likely to be repeated in the United States at some point.

There is also the well-publicized shortage of truck drivers in the United States which drives up labor costs and makes Waste Management vulnerable to union demands. CBS News reported that the United States is now short 50,000 truck drivers, and the situation is expected to get worse over the next decade.

This threatens Waste Management because there are plenty of more prestigious jobs available for its core labor force. One result of this will be to force Waste Management to pay higher wages for the same workers.

A potential long-term solution would be self-driving garbage trucks, which would be a difficult technology to perfect and sell to the public. Building an autonomous truck that can drive a straight line down a highway is easy; devising a vehicle that can navigate busy city streets and back alleys, and safely pick up dozens or hundreds of dumpsters would be far harder.

Even if engineers were to create a self-driving garbage truck; there is no guarantee voters or politicians would allow it on the streets. The backlash against autonomous vehicles is already underway, and it will generate a political controversy bigger and more heated than the gun control debate, The Week Columnist James Pethokoukis predicted.

Is Waste Management a Good Investment?

When those theoretical concerns are put aside, Waste Management has some attractive qualities as a stock.

Its shareholders were rewarded with a return on equity of 25.63% on September 30, 2017. There is also a dividend of 42.5¢ a share scheduled to be paid on November 30, 2017. That’s very good for a stock which was trading $80.70 on November 17, 2017. The dividend was 1.5¢ higher than the 41¢ paid out last year.

Despite those attributes, I don’t like Waste Management because of the low amount of cash and float. That might be a sign of serious problems or an impending cash shortage which might bring this company down.

I would advise investors to stay away from Waste Management until its’ stock price drops much lower. It seems overpriced right now, and I cannot see how the dividend can be maintained.

If Waste Management’s price were to fall to say $50 a share it would be a value investment. Until then stay away, and look for bargains elsewhere.