Waste Management (NASDAQ: WM)

Justin Dent

Sin Tung Chan (Sindy)

The Basics

Company Name: Waste Management Ticker: WM Industry: Waste Management, Environmental and

Facility Services Price: 37.20 52-week range: 30.82 – 37.98 Market Cap: 17.17B

Presentation Outline

Part I: The Economy & Industry

Part II: The Case of WM

Part III: The Numbers

Part IV: Recommendations

Part IThe Economy & Industry

Industry Overview

The Waste Management industry provides services to commercial, residential and industrial customers

Companies collect, treat and dispose of garbage and other waste materials, recover reusable materials, and provide decontamination services.

Service Segmentation:

Commercial Waste

Residential Waste

Recyclables

Other—Construction & Demolition

Industry Overview (cont.)

The health of the Waste Management industry is highly reliant on the economic landscape

Industry Trends

Firms are moving towards consolidation and vertical integration due to the increasingly capital-intensive nature of the industry.

A push towards recycling will likely increase the profitability of the collection of recycled goods and municipal contracts

Increased fuel prices and regulation has resulted in decreased profits of an average -0.2% per year.

Fuel and environmental levies (increased costs for consumers) have helped to mitigate these effects

Industry Composition The Waste Management Industry is characterized by a decentralized

number of enterprises but centralized revenues.

Despite a high number of participants in the industry, barriers to entry are increasing;

Competition, regulation, and capital intensity represent the highest barriers

Industry Composition (cont.)

Key Determinants of Growth

Population

Industrial Production

Consumption

Indicators & Outlook

ISM manufacturing index:

50.2 in December

53.1 in January

54.2 in February

Housing Starts

841 in November

973 in December

890 in January

Indicators & Outlook (cont.)

Personal Consumption :

1126.5 in November

11278.3 in December

11296.5 in January

Consumer Sentiment

72.9 in December

73.8 in January

77.6 in February

Part IIThe Case of WM

Brief Overview

Founded and incorporated in Oklahoma in 1987 as USA Waste Services, Inc. Waste Management, Inc.(WM) was reincorporated in Delaware in 1995

Today, WM provides integrated waste management services in North America.

Landfill sites: 269

Transfer stations: 297

WM develops, operates and owns waste-to-energy and gas-to energy facilities in the United States

Waste Combustion Plants: 22

WM in the Industry Key numbers

Annual Sales (2012):

WM: $13.65B

Republic Services: $8.12B

Casella: $480.82M

Market Share:

Landfills:

WM: 269

Republic Services: 191

Casella: 9

WM in the Industry (cont.)

High levels of acquisition activity

Second largest waste-to-energy business

International motivations

Technological innovation

Competitive Advantage

Economies of Scale

Owns and operate the largest network of landfills in the industry

Technology

Increasing Barriers to Entry

Inelastic Demand

Foreign investments

Risky Business

Commodity headwinds

Competitive acquisitions/mergers

Regulations

Growth Opportunities

Diverse portfolio

Capital Investments

Acquisitions

Convert fleet to use alternative fuel sources

Expand and grow the Waste-to-Energy sector

Part III The Numbers

Revenue

2008 2009 2010 2011 20120

2

4

6

8

10

12

14

16

Waste Management, Inc. Republic Services, Inc.

$ (B

illio

ns)

Margins (2012)

Waste Management, Inc. Republic Services, Inc. Waste Connections Inc.0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

14.66%16.37%

18.91%

34.95%

38.34%

42.44%

5.99% 7.04%9.57%

Opearting Margin Gross Margin Profit Margin

Low Net Operating & Profit MarginAcquisition & growth initiatives

Acquisitions include Oakleaf and a number of collection operations, including oilfield services, and several recycling operations.

Acquisition of Oakleaf (only) Increased operating costs by $263 million

Recycling operation & High Fuel Price

Total $338 million operating cost

ROA, ROE

Waste

Management, I

nc.

Republic Se

rvice

s, Inc.

Waste

Connections I

nc.0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

5.48%

4.36% 4.67%

ROA

Waste

Management, I

nc.

Republic Se

rvice

s, Inc.

Waste

Connections I

nc.0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%

13.17%

7.44%9.73%

ROE

P/E & Peer P/E

P/E Forward P/E0

5

10

15

20

25

30

16.22 15.6716.29 15.39

25.6

17.2

Waste Management, Inc. Republic Services, Inc. Waste Connections Inc.

EPS

Waste Management, Inc. Republic Services, Inc. Waste Connections Inc.0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1.76

1.56

1.31

Capital Structure

Waste Management, Inc. Republic Services, Inc. Waste Connections Inc.

Market Cap 61% 60% 64%

ST Debt 2.90% 0.10% 1.50%

LT Debt 35.90% 39.90% 34.50%

Pref. Equity 0% 0% 0%

5%

15%

25%

35%

45%

55%

65%

75%

85%

95%

61% 60% 64%

2.90% 0.10%1.50%

35.90% 39.90% 34.50%

0% 0% 0%

Free Cash Flow

Industry Waste Management, Inc. Republic Services, Inc. Waste Connections Inc.0

100

200

300

400

500

600

700

800

900

337.14

785

610.3

262.81

FCF

$ (M

illio

ns)

Dividends & Payout

Waste

Management, I

nc.

Republic Se

rvice

s, Inc.

Waste

Connections I

nc.0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%

4%

3%

1%

Dividend Yield

Waste

Management, I

nc.

Republic Se

rvice

s, Inc.

Waste

Connections I

nc.0%

10%20%30%40%50%60%70%80%90%

81%

59%

28%

Payout Ratio

Estimated Growth

Revenue: 2.6% (YoY)

EPS: 4.4% (YoY) 3.1% (Long Term)

Estimate Sale

Estimate EPS

Part III The Recommendation

Estimate

High – 42

Mean – 37.2

Low - 34