EUR 850.00 For Business Accounts Only

Morningstar | Robust Solid Waste Pricing and Volume Are Offsetting Waste Management's Recycling Headwinds

Waste industry leader Waste Management enjoys unmatched dominance in landfill ownership. As a fully integrated waste-hauler, the company leverages a vast network of collection routes, which bestows significant control over the waste stream, funneling trash from numerous end-market customers (commercial, industrial, and residential) into its valuable landfill assets. Third-party waste haulers also make use of the company’s landfills. In our view, intangible assets (immense regulatory hurdles to new landfill ownership) and industry-leading route density have enabled Waste Management to carve out a strong competitive position that has supported healthy pricing gains (on average) over the years. A couple of other waste industry leaders, Republic Services and Waste Connections, enjoy similar competitive advantages, but beyond those, size falls off quickly. Management execution has been impressive over the past five-plus years, with a renewed focus on yield management and optimizing the company's cost infrastructure, including the divestiture of noncore waste-to-energy assets. In our view, these factors have enabled the firm to translate healthy U.S. macroeconomic growth into waste volume gains, core pricing above inflation, and positive operating leverage. Although the company's traditional solid waste operations are firing on all cylinders, its recycling business has encountered painful headwinds; prices for recycled commodities the company extracts and sells, particularly old corrugated cardboard, have plummeted because of China’s decision to suspend certain import licenses during the second half of 2017. We expect the company to partly mitigate these headwinds by finding alternative outlets for its recycled commodities while reducing contamination rates, but volatility in recycled commodity prices is likely to remain a risk factor for earnings in the year ahead. We expect Waste Management to continue its acquisition strategy, focusing on tuck-in opportunities to boost market share in established geographies. Its ability to raise core prices on acquired volume (thanks to its vast ownership of landfills, a preferred asset) should remain a key organic growth driver.