Assertin’ What Is Certain
Benjamin Franklin famously wrote, “In this world nothing can be said to be certain, except death and taxes.” You have to admit the man had a pithy point, as he often did, but I would actually add garbage to the mix. Death, taxes, and garbage. That sounds about right. Luckily, there are ways to invest in all three.
Now death is a little too morbid for my taste, but if you were so inclined you could go with Service Corporation International (NYSE:SCI). For bookkeeping and taxes, I would recommend Intuit (NASDAQ:INTU), although I personally let that pitch go by, so to speak.
And for garbage, Waste Management (NYSE:WM) is the clear market leader. In addition to having the highly desirable qualities of superiority, ubiquity, and necessity, Waste Management also offers sustainability – unlike Homer Simpson’s ill-fated effort in Springfield.
Carry On My Wasteward SUN
Despite only making up 4% of the global population, the U.S. produces 30% of the world’s waste. That is staggeringly disproportional and financially enviable for a company like Waste Management. And unless the pandemic becomes a plague of biblical proportions, the U.S. population is set to grow at a 1.69% CAGR for the foreseeable future, according to the U.S. Census Bureau.
We are going to have more people, and those people are going to live longer lifespans than ever before in the history of mankind. And that means garbage collection and disposal will remain in high demand, although demand makes it seem like it is a commodity when, in fact, it is much closer to a utility. Not only that, but it is also a utility with a very high barrier to entry. So there’s a nice moat here, too.
There are three players in North America that command most of the market share. They are Waste Connections (NYSE: WCN), Republic Services (NYSE: RSG), and of course Waste Management. The fourth largest solid waste company was Advanced Disposal Services (NYSE:ADSW), that is until Waste Management acquired them last year for $4.9 billion.
Green Is Good
As if the Advanced Disposal acquisition wasn’t already a windfall for Waste Management, back in July, Waste Management announced they were getting a discount. Instead of the initial agreement at $33.15 per share, Waste Management would be buying Advanced Disposal for $30.30 per share. So the deal is now closer to $4.6 billion. As a matter of fact, the deal was just completed.
It is expected to be immediately accretive to Waste Management’s earnings and cash flow. This is consolidation by acquisition and it is the type of consolidation that should only reinforce Waste Management’s dominant position. It will expand its footprint, particularly on the East Coast where Advanced Disposal had a foothold.
If Gordon Gekko were portrayed today, he might say green is good. ESG investing (Environmental, Social, Governance) has really taken off in the last year or so. One need only look at a company like Tesla (NDAQ: TSLA) or solar stocks like SolarEdge Technologies (NDAQ: SEDG), Enphase Energy (NDAQ: ENPH), Sunrun (NDAQ: RUN), and JinkoSolar (NYSE: JKS).
Waste Not, Want Not
The difference is with Waste Management you’re getting GARP (growth at a reasonable price) whereas the nosebleed valuations on some of those stocks might be disconcerting to value investors. They reported Q3 earnings on Monday, and it was a solid beat on both the top and bottom lines.
Earnings per share came in at $1.09 versus $1.03 estimated while revenue came in at $3.86 billion versus $3.73 billion estimated. Over the last four quarters, the company has surpassed consensus EPS estimates as well as consensus revenue estimates three times. Here are the numbers in their entirety.
As I alluded to earlier, sustainability is part of my criteria for evaluating Waste Management, and evidently CEO Jim Fish has a similar mindset. He had this to say during the conference call:
In addition to our strong quarterly results, we are also proud to have published our 2020 Sustainability Report last month. Titled ‘Building Value Together,’ the report describes how we are addressing challenges and opportunities related to the environment, social issues and governance, and doing so in close partnership with our customers, suppliers and communities. Amidst the crises of 2020, we remained steadfast to our commitments of putting people first, advocating for inclusion and diversity, protecting the environment, and contributing to a circular economy.”
The 2020 Sustainability Report aligns perfectly with ESG investing. This is a forward-thinking company. Speaking of forward-thinking, here’s what Fish had to say about 2020 guidance during earnings:
“Given the strength of the company’s third quarter, which demonstrated the resilience of the business model and strong execution on reducing the cost to serve, the company expects to exceed its 2020 adjusted operating EBITDA margin guidance of 28.0% to 28.5% and generate free cash flow in excess of $2B.”
For me, the real takeaway here is the phrase “resilience of the business model.” Resiliency is what separates a good trade from a good investment.
Not A Trash In The Pan
Bottom line: Waste Management is the clear industry leader in an industry that is absolutely indispensable. We need it. We simply cannot do without it.
It’s Bill Gates’ second largest personal holding, which admittedly is just an intangible. Something more tangible is it’s raised its dividend for 17 straight years. And as we navigate a national election whose outcome could be called into question for days if not weeks on end, Waste Management offers a relative safe haven for investors fearful of volatility.
Going back to Benjamin Franklin’s quote, one additional thing is certain; the stock market doesn’t like macro uncertainty. So why not go with a resilient company which has superiority, ubiquity, and necessity. Not to mention sustainability.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.