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WIKI ANALYSIS
If you are looking for the bankrupt lender whose ticker was WM until ceasing operations in 2008, see J P Morgan Chase (JPM)/Washington Mutual (WM).
Waste Management, Inc. (NYSE: WM) is North America's largest solid-waste collection provider, with number two Allied Waste and third-place Republic Services as its only other significant competitors. It generates revenue not only through the collection of garbage, but also through recycling services as well as sales of methane generated from landfill decomposition. Despite its scandal-tainted past, (the largest pre-Enron accounting scandal), the company remains the market leader through its massive fleet of waste-collection vehicles and large system of landfills.
Oil prices have a significant impact on Waste Management's business. Because such a large part of the company's business consists of transporting waste to landfills, rising oil prices can put a dent in the company's profits. The company also has to deal with ever changing government regulations, which can add expense to the waste disposal process.
Company Overview
Waste Management's income is derived primarily through contracts with various governments and municipalities. As such, the company does not receive payment for each specific service such as garbage collection, landfill storage, and recycling; the company is paid on a contract basis for completing the services promised.
Business and Financial Metrics
First Quarter 2010 Results (ended March 31, 2010)[1]
Waste Management reported net income for the quarter of $182 million, or $0.37 per diluted share, compared with $155 million, or $0.31 per diluted share, for the first quarter of 2009. This is an increase in earnings per diluted share of over 19%. Revenues for the first quarter of 2010 were $2.93 billion compared with $2.81 billion for the same 2009 period, an increase of 4.4%. Revenue increased primarily because of improving commodity prices and year-over-year yield increases.
Business Segments[2]
Garbage Collection
Collection involves picking up and transporting waste and recyclable materials from where it was generated to a transfer station, material recovery facility or disposal site. Waste Management generally provides collection services under the following types of arrangements:
- For commercial and industrial collection services, typically Waste Management has a three-year service agreement. The fees under the agreements are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the disposal facility, labor costs, cost of disposal and general market factors. As part of the service, Waste Management provides steel containers to
most customers to store their solid waste between pick-up dates. Many are designed to be lifted mechanically and either emptied into a truck’s compaction hopper or directly into a disposal site.
- For most residential collection services, Waste Management has a contract with, or a franchise granted by, a municipality, homeowners’ association or some other regional authority that gives the company the exclusive right to service all or a portion of the homes in an area. These contracts or franchises are typically for periods of one to five years. Waste Management also provides services under individual monthly subscriptions directly to households. The fees for residential collection are either paid by the municipality or authority from their tax revenues or service charges, or are paid directly by the residents receiving the service.
Landfills
Landfills are the main depositories for solid waste in North America. At December 31, 2009, Waste Management owned or operated 268 solid waste landfills, which represents the largest network of landfills in North America.
Solid waste landfills are built and operated on land with geological and hydrological properties that limit the possibility of water pollution, and are operated under prescribed procedures. The operation and closure of a solid waste landfill includes excavation, construction of liners, continuous spreading and compacting of waste, covering of waste with earth or other inert material and constructing final capping of the landfill.
Transfer
At December 31, 2009, Waste Management owned or operated 345 transfer stations in North America. Waste Management deposits waste at these stations, as do other waste haulers. The solid waste is then consolidated and compacted to reduce the volume and increase the density of the waste and transported by transfer trucks or by rail to disposal sites. Access to transfer stations is critical to haulers who collect waste in areas not in close proximity to disposal facilities. Fees charged to third parties at transfer stations are usually based on the type and volume or weight of the waste deposited at the transfer station, the distance to the disposal site and general market factors.
Waste-to-Energy and Power Production
As of December 31, 2009, Waste Management owned or operated 16 waste-to-energy facilities and five independent power production plants, or IPPs, which are located in the Northeast and in Florida, California and Washington. At waste-to-energy facilities, solid waste is burned at high temperatures in specially designed boilers to produce heat that is converted into high-pressure steam. As of December 31, 2009, waste-to-energy facilities were capable of processing up to 21,100 tons of solid waste each day. In 2009, waste-to-energy facilities received and processed 7.0 million tons of solid waste, or approximately 19,200 tons per day.
Waste Management generate steams at its waste-to-energy facilities for the production of electricity. The company sells the electricity produced into wholesale markets, which include investor-owned utilities, power marketers and regional power pools.
Recycling
Waste Management's recycling operations focus on improving the sustainability and future growth of recycling programs within communities and industries. In 2001, Waste Management became the first major solid waste company to focus on residential single-stream recycling, which allows customers to mix recyclable paper, plastic and glass in one bin. Residential single-stream programs have greatly increased recycling rates. Single-stream recycling is possible through the use of various mechanized screens and optical sorting technologies.
Waste Management's recycling operations include the following:
- Materials processing — to collect recyclable materials from residential, commercial and industrial customers and direct these materials to a facility for processing. Waste Management operates 90 facilities where paper, metals, plastics, glass and other recyclable commodities are recovered for resale.
- Plastics materials recycling — Using state-of-the-art sorting and processing technology to process, inventory and sell plastic commodities making the recycling of such items more cost effective and convenient.
- Commodities recycling — Marketing and reselling recyclable commodities to customers world-wide.
Other
Waste Management provides recycling brokerage and electronic recycling services. Recycling brokerage includes managing the marketing of recyclable materials for third parties. Waste Management also provides electronics recycling. The company recycles discarded computers, communications equipment, and other electronic equipment. Services include the collection, sorting and disassembling of electronics in an effort to reuse or recycle all collected materials.
Waste Management develops, operates and promotes projects for the beneficial use of landfill gas through the Waste Management Renewable Energy Program. Landfill gas is produced naturally as waste decomposes in a landfill. The methane component of the landfill gas is a readily available, renewable energy source that can be gathered and used beneficially as an alternative to fossil fuel. The EPA endorses landfill gas as a renewable energy resource, in the same category as wind, solar and geothermal resources. At December 31, 2009, landfill gas beneficial use projects were producing commercial quantities of methane gas at 119 of Waste Management's solid waste landfills.
WM Healthcare Solutions subsidiary offers integrated medical waste services for healthcare facilities, pharmacies and individuals. Waste Management provides full-service solutions to facilities to assist them in best practices, identifying waste streams and proper disposal.
Waste Management also rents and services portable restroom facilities to municipalities and commercial customers under the name Port-o-Let, and provides street and parking lot sweeping services.
Trends and Forces
Seasonality
The waste industry is subject to seasonal nature of waste production. In the warmer months, for example, revenues are higher than average because of increased waste that comes from higher levels of new home construction and demolition. Furthermore, the months of June through November can also increase revenues because the weather during six-month period of time is most conducive for hurricane activity. On the negative side, inclement weather such as major blizzards can also prohibit trash-collection operations from going out on the road, which decreases revenues on the average.
Legislation
Waste companies must ensure that they comply with relevant environmental, health, and safety laws in the areas where they operate. Breach of these laws could lead to lawsuits. WMI is even responsible for pre-existing conditions of its assets, such as landfills, or for the environmental contamination caused by previous owners of these assets. Consequently, the litigation that may result from these potential liabilities could adversely affect Waste Management's financial health.
Governmental Regulation
Regulations at the local, state (U.S.), provincial (Canada), or federal levels greatly influence how companies in the waste industry do their business. Some of the regulations imposed on companies such as Waste Management include those limiting the locations for new landfills or facilities, those controlling prices/rates/volumes, and those restraining the types of waste can be transported or disposed of. Future regulations could impose further restrictions on Waste Management and compel the company to close particular landfills, obtain additional permits, or replace capital assets such as equipment and facilities.
Rising Fuel Prices
Given that the majority of Waste Management's vehicles run on petroleum fuels (although some run completely on natural gas), the company's profitability is heavily dependent on volatile oil prices. Furthermore, rising fuel prices can negatively impact Waste Management if its vendors raise their prices to compensate for rising costs.
Competition
Allied Waste, Republic Services and Waste Services are the only two competitors in the waste industry that operate on a similar scale to Waste Management. The waste industry overall is very fragmented, with the majority of companies having a strong presence only in certain geographical regions, such as Waste Connections in the Southern and Western United States. However, the top three companies have all undertaken strategies of acquisitions to expand their respective market shares.
References
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