The waste hauler posted solid earnings and revenue beats in the third quarter. Here’s what investors need to know. By virtually any metric, Waste Management had a great quarter. Earnings of $0.84 per share beat analysts’ estimates of $0.80. Revenue also came in $40 million above expectations. Better yet, the company’s performance also handily trounced its year-ago quarter.
The company even outperformed its year-ago quarter in metrics such as customer churn — which fell to 8.7%, the lowest since 2014 — and core price, consisting of price increases net of rollbacks and fees, other than fuel surcharges, which rose to 7% from 4% a year ago.
All this led the company to raise its adjusted diluted EPS guidance for 2016. The previous range was between $2.83 and $2.86 for the year, but the company is now predicting at least $2.91, an 11% increase over 2015. The company is also predicting free cash flow for 2016 of between $1.6 billion and $1.7 billion.
With strong results like this, the market’s reaction seems a bit tepid. But investors should be thrilled with the company’s performance.
Recycling ups and downs
The company’s recycling business has been a thorn in its side in recent quarters, as global commodity prices for recycled goods have shrunk. Because plastic is derived from petroleum, low oil prices have made it cheaper to make new plastic rather than pay to clean and recycle old plastic. Commonly recycled products such as aluminum cans and paper have also seen their prices fall, with the Chinese economic slowdown hurting sales of recycled goods to China, a major purchaser of U.S. recycled goods. In response, Waste Management sold or exited 21% of its recycling facilities in recent years.
But this quarter, the company bucked the trend, posting a 13.6% increase in average commodity prices at its recycling facilities, along with a 0.9% increase in volumes. Of course, a single quarter doesn’t mean the company’s recycling woes are over, and indeed, on the earnings call, COO Jim Trevathan was quick to point out that we shouldn’t expect these types of prices to continue:
You can’t fall into the trap of saying, no, prices are going up, so let’s go back to the old style of doing business in recycling. We absolutely will never do that as long as I’m breathing. … When you look at the pricing, it’s up, but it’s not dramatically up. And it’s been fairly volatile over the last few years, so we’re not declaring victory; we’re going to continue to go after all the operating cost that we can on the recycling side. And like I said, we won’t expect to get a benefit from it in 2017.
In light of the recent issues surrounding recycling, the company has been reconfiguring its recycling contracts as they come up for renewal, and Trevathan estimates that process is about 80% complete. Hopefully, when all of the contracts have been updated, recycling will no longer be the drag on the company that it has been, but investors should be aware that this quarter’s recycling performance is likely to be atypical.
To read the full story, visit http://www.fool.com/investing/2016/11/08/3-key-takeaways-from-waste-managements-earnings.aspx.