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Don't Throw Trash Stocks Away

Posted: Jan 23, 2009 11:11 AM by Greg Sushinsky

Tickers in this Article: SRCL, WCN, RSC, WMI

With the constant barrage of negative headlines surrounding the markets, investors sometimes wonder not only whether they should buy stocks, but whether they should get rid of the ones they have. However, emptying out your portfolio in a down market is often a mistake, as you'll inevitably end up throwing out the good with the bad; after all, not all industries and stocks deserve such harsh or hasty treatment. Trash-hauling stocks, led by Waste Management Inc. (NYSE:WMI), are one such example.

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The Glamorous Business of Garbage
It's easy to be facetious about the trash business, as few things are less glamorous than picking up and carrying away garbage. At the same time, that's exactly what makes these stocks so dependable - trash collection is one of those mundane, necessary and common operations that keeps our society going. In good times and bad, trash has to be picked up, transported and disposed of. This is a key to the viability of the industry, as it is both vertically integrated and nearly recession proof. Companies such as Waste Management, and its large rival, Republic Service Industries Inc. (NYSE:RSC), along with Waste Connection (NYSE:WCN), and others, have a steady demand for their services, even when most other stocks are showing rotten returns.

Trash Is Cash
Waste Management, with a $15.7 billion market cap, digs up annual revenues of $13 billion. The company had an EPS of $2.07 in 2007, and is expected to finish out 2008 at $2.23 when it reports on February 12. The company is projecting $2.28 EPS for 2009. The trash business is a great cash-generating business, so Waste Management's operating cash flow is a robust $2.5 billion. It has cash-on-hand of $500 million, and carries a long-term debt of $8.3 billion. In addition to this, Waste Management is making a "green play" by capitalizing on the drive to recycle, and continues to do a significant segment of this with ongoing expansion. The stock has traded from between roughly $24 per share to $39 per share in the last year, with a recent price of $32. It pays a regular dividend that currently yields 3.4%, and currently trades at a PE of 13. (For more on operating cash flow, be sure to read Operating Cash Flow: Better Than Net Income?)

The Value of Waste
The trash-hauling industry hit full swing years ago as municipalities began outsourcing this service. Waste haulers grew along with the feeling that these companies would have almost limitless growth, especially with the additional recycling features that were expected to fuel this growth. WMI competitors Republic Services Industries and Allied Waste recently completed a merger; the combined forces of these two healthy companies in a strong industry is a good sign in a poor economy. WMI, which is deeply into the recycling business, also expanded from commercial and residential trash hauling to medical waste, a specialty of another of its competitors: Stericycle (Nasdaq:SRCL).

While the waste industry has expanded, the trash haulers are not the high-fliers some would have predicted years ago. But they aren't trash either, and soaring predictions have risen once again about the future of the industry, despite the short-term flat growth. Some of the recent value investors' love affair with waste industry stocks might be overplayed or premature, but these stocks do have those strong dividends and relatively strong business performance in light of the awful economy, and are stable cash earners with long-term growth potential. If the majority of the "green growth" still lies ahead, that will also be a plus for companies who deal in garbage.

Not a Wasted Investment
Although the economy might make investors feel that they should bundle up what's left of their portfolios before they're broke, they probably shouldn't put Waste Management, and other waste industry stocks, out on the curb just yet. WMI still pays a good dividend and has performed better on a relative basis than most other (more glamorous) industries. When overall market returns stop being so foul, trash-haulers are likely to emerge with the sweetest returns. Even in this market, Waste Management is not a wasted investment; buy in carefully, keep an eye on its earnings trajectory and wait for returns to roll in.

By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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