Best stock to invest in – Solid Play in Solid Waste

Best stock to invest in

by Debra Fiakas CFA

The last article “Advanced
Disposal Services:  Hauling a Heavy Load
” on July 18th
inspired a closer look at the solid waste management sector in which
it competes.   The solid waste industry is growing at a
good pace between 1.6% and 2.0% per year, largely on population
growth and the human penchant for consumption and waste.  In
the U.S. solid waste collection is still populated by many
localized, family-owned businesses, despite the emergence of several
large consolidators that now command as much as 55% of the revenue
in waste handling and disposal.  Fragmentation creates ample
opportunity for the incumbents to ratchet up growth rates.

Advanced Disposal Services is the most recent in the sector to enter
the public capital markets with an initial public offering of
stock.  There are several seasoned securities in the sector and
that begs the question, what is the best stock to own in the
group. 

For investors who are looking for value, the solid waste sector is
not fertile ground.  The average price multiple in the selected
group presented in the table here is 35.31times expected
earnings.  This is well above the average ‘forward price
earnings’ multiple of the S&P 500 Index at 17.6 times expected
earnings in 2017.  Only Stericycle
(SRCL:  Nasdaq)
, a provider of specialty waste collection
and disposal services for the health care industry, compares to the
broader market with a forward PE of 16.08.  Among the plain
vanilla garbage haulers, Waste
Management
(WM: 
NYSE
) appears to be the best value with a forward PE of 21.71.

Forward
Price-Earnings Ratio
Price-Earnings
to Growth Ratio
Advanced Disposal Services

Since its growth that is the primary attraction to the solid waste
industry, a view on value relative to growth might be a better
method for sussing out a winner.  The Price-Earnings to Growth
Ratio puts value and growth in perspective.  Here again it is
another specialty services player, Heritage Crystal Clean
(HCCI:  Nasddaq)
that offers the most attractive value
against growth with a ‘PEG ratio’ of 1.07.  Even that measure
suggests just fair valuation for the Heritage parts cleaning and
waste solvent handling service for auto maintenance and other
industrial companies.  The outsized PEG ratios of the rest of
the regular waste haulers reveals just how much investors seem to
like this sector.

Some investors might be quite happy ‘paying up’ to own shares in a
solid waste management company. The business model is conducive to
strong cash flow generation on the back of reliable recurring
revenue streams.  Several pay ample dividends, delivering
enticing yields even at current price levels.  The top of the
list is Covanta Holding (CVA
NYSE
) with a forward dividend yield of
7.49%.   


The skeptical investor might need some comfort in the quality of an
investment target.  Return on assets provides a measure of
efficiency to see which company makes the most out of the trucks,
handling equipment and landfills that are necessary for waste
management. The winner in this contest is the ‘big guy’ Waste
Management, which last year wrung income from its assets at rate of
7.42%.

This simple exercise reveals one truth in waste handling: 
scale matters.  The most asset efficient company, Waste
Management, is also among those that deliver strongest earnings and
dividends, making it a solid play in the solid waste sector.


Debra Fiakas is the Managing Director of
Crystal Equity
Research
, an alternative
research resource on small capitalization companies in selected
industries.

Neither the author of the Small Cap
Strategist
web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.

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