Wednesday, October 26, 2011

Research: WM Waste Management and its leverage

At first glance, WM looks pretty stable. Revenues, expenses, and income doesn't fluctuate much. I don't like it's low return on assets. Google finance shows 4.7% ROA for 2010. I think the ROA is too low for WM to be having so much debt. Shareholder equity has increased only from 5.7bn in 2007 to 6.2b in 2010. Fortunately, WM pays a dividend and repurchases shares, meaning shareholder equity would be higher if they had retained it. Earnings per share is decreasing even though the number of outstanding shares are decreasing. I think WM would be much better off paying off debt instead of repurchasing stock or paying dividends. With a such a low ROA, I think WM has a lot to benefit by relieving itself from more interest expense. Capital expenditures are consistently about 50% of cash, which is higher than I like to see. Its debt is not unmanageable, but I think WM can definitely be in a better capital position. Lastly, I'm not happy about its 5.7bn goodwill. Its total equity is 6.2bn in 2010 and its current market value is 16bn. This means WM really only has about 500m of assets on the balance sheet. I believe it is very overpriced at a PE ratio of 17.

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