Zacks Small Cap Institutional Research



June 30, 2009

Research Associate: Binod Kr. Das, .

Editor: Tanuka De, ., MBA

Sr. Ed.: Ian Madsen, CFA; imadsen@; 1-800-767-3771, x9417

111 N. Canal Street, Suite 1101 ( Chicago, IL 60606

| Waste Management, Inc. |(WMI-NYSE) |$28.05 |

Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: 2Q09 Earnings Update; misses expectations

Previous Edition: Coverage Initiated by One Broker, June 29, 2009.

Flash Update [earnings update in progress; final report to follow]

On July 30, 2009, Waste Management, Inc. announced its 2Q09 financial results. Highlights are as follows:

Total revenue was $2,952 million, compared with $3,489 million in 2Q08. The Company’s reported total revenue was lower than the Zacks Digest average estimate of $3,040 million.

Operating income was $534 million, compared with $632 million in 2Q08. The Company’s reported operating income was lower than the Zacks Digest average estimate of $564.9 million.

Net income was $247 million, compared with $318 million in 2Q08.

EPS was $0.50, compared with $0.64 in 2Q08. The Company’s reported EPS was lower than the Zacks Digest average estimate of $0.58.

Guidance: The Company said that for the second half of 2009, it expects year-over-year earnings decrease of approximately $0.04 per share due to continued weakness in energy prices at certain of Wheelabrator plants. For FY09, it expects diluted earnings per share (EPS) on an adjusted basis to be in the range of $1.95 to $1.99.

Share repurchase: The Company announced that it has decided to resume its share repurchase program, with authority to spend up to $400 million during the remainder of 2009.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON WMI.

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

Waste Management, Inc. (WMI or the Company) is the largest solid waste management concern in the world. Through a network of more than 300 landfills and incinerators in North America, the Company handles approximately 130-135 million tons of disposal volumes per year, representing some 40.0%-45.0% of the U.S. waste disposal market.

70.0% of the firms covering the stock provided positive ratings on the stock while the remaining 30.0% rated the stock neutral. None of the firms gave a negative rating on the stock. Eight firms provided target prices. The firm with the highest target price of $40.00 did not provide the valuation metric and rated the stock Buy. The firm with the lowest target price of $27.00 based the valuation on 6.6X EV/EBITDA (NTM) target multiple and rated the stock Neutral.

Buy or equivalent outlook – seven firms or 70.0%: Target prices range from: $34.00-$40.00. These firms remain positive on WMI based on the Company's generally attractive valuation metrics, improving financial condition, solid dividend yield, and positive near-term outlook. Despite concerns about rising fuel costs, firms appreciate WMI's strategy of increasing prices and shedding lower-margin businesses. They state that WMI continues to generate substantial free cash flow and its sales/volume mix and cost controls resulted in expanding margins, a trend which they believe is sustainable. Firms expect to see continued solid price growth and margin improvement in the remainder of FY09 despite ongoing volume weakness.

Neutral or equivalent outlook – three firms or 30.0%: Target prices range from: $27.00-$33.00. Firms expect the Company to post price-driven margin gains and EBITDA growth. The firms believe that WMI can exceed industry growth rates and outperform its peers, given its superior disposal capacity, sharp reductions to operating costs made just this year, its preeminent position within waste-to-energy, and its strong reputation in the marketplace. However, they expect less potential for outsized multiple expansion relative to its peers.

June 29, 2009

Recent Events [Note: Only highlighted material has been changed.]

On June 19, 2009, WMI paid a quarterly cash dividend of $0.29 per share to stockholders of record on June 1, 2009.

On June 12, 2009, WMI announced that it entered into an agreement with BigBelly Solar under which the Company will provide WM Solar Powered Trash Compactors to its customers including municipalities and high-traffic facilities. Under the agreement, Waste Management became the exclusive waste and environmental services company distributor of BigBelly solar compactor technology in North America.

On May 21, 2009, WMI and InEnTec LLC announced the formation of S4 Energy Solutions LLC, a joint venture to develop, operate, and market plasma gasification facilities using InEnTec's Plasma Enhanced Melter (PEM(TM)) technology. The joint venture is expected to process waste from the country's increasingly segmented commercial and industrial waste streams to produce a range of renewable energy and environmentally beneficial fuels and industrial products as well as to generate electricity.

On May 21, 2009, Will County and Waste Management of Illinois, Inc. announced a plan to jointly develop a landfill gas-to-energy plant at the Prairie View Recycling and Disposal Facility near Wilmington.

On April 29, 2009, WMI reported its 1Q09 earnings results. The highlights are as follows:

• Revenue of $2.81 billion in 1Q09 versus $3.27 billion in 1Q08.

• Net income of $155.0 million in 1Q09 versus $241.0 million in 1Q08.

• EPS was $0.31 million in 1Q09 versus $0.48 million in 1Q08.

Overview [Note: Only highlighted material has been changed.]

Headquartered in Houston and incorporated in 1987, Waste Management, Inc. (WMI or the Company) is the largest garbage management company in the U.S. WMI provides integrated waste management services, consisting of collection, transfer, disposal, recycling, and resource recovery, as well as other hazardous waste services to commercial, industrial, municipal, and residential customers.

The Company manages its operations through seven groups, five of which are organized by area. The other two functional groups (Recycling and Wheelabrator) provide waste collection, transfer, recycling and resource recovery, and disposal services. WMI’s network of operations includes 354 collection operations, 341 transfer stations, 277 active landfill disposal sites, 16 waste-to-energy plants, 105 recycling facilities (30 of which are single-stream technology), 108 landfill gas projects, and 6 independent power production plants. These assets enable Waste Management to offer a full range of environmental services to nearly 20 million residential, industrial, municipal, and commercial customers.

Key investment considerations, according to the analysts, are as follows:

|Key Positive Arguments |Key Negative Arguments |

|Compelling Fundamentals: The Company has strong cash flow generating |Financials: The extent of price increases in both collection and landfill|

|characteristics, a dominant market capitalization, and a consistent, |sides of the business will determine the extent to which margins can |

|annual dividend policy. WMI is also seen as streamlining its cost |recover. Cyclical parts of the business are also suffering from continued|

|structure. |price pressure. |

|Financials: Recycling revenue and profits are benefiting from higher |Increasing Costs: WMI is seen as facing cost-side pressure from higher |

|commodity prices. |energy, utility, health care, and insurance costs. |

|Competitive Advantage: The construction contracts are short term in |Economic Slowdown: A slowdown in the economy could hurt volumes and |

|nature, and thereby, the Company can negotiate on price, which is seen as|prices, leading to lower cash generation for debt repayment. |

|an advantage, considering the competitive landscape. |Increasing Interest Rates: WMI is also at risk from potentially sharp |

|Sustained Pricing Growth: Sustained pricing growth is needed to offset |increases in short-term interest rates, given that a sizeable portion of |

|higher costs, such as labor, fuel, and other commodity increases, and |its debt is variable rate. |

|most of the analysts believe the Company will be able to sustain this |Execution Risk: WMI faces execution risk in its aggressive pricing |

|pricing discipline. |campaign, as higher rates may not be sufficient to offset lost volume. |

Further information is available at the Company’s website: .

NOTE: The Company’s fiscal year coincides with the calendar year.

May 14, 2009

Revenue [Note: Only highlighted material has been changed.]

1Q09 Summary: Total revenue in 1Q09 declined 14.0% to $2,810.0 million from $3,266.0 million in 1Q08. Of the $456 million decrease in revenue, only $132 million, or 4.7% of revenue, was attributable to operational impacts to the solid waste collection and disposal business. The balance of the decline is due to commodity impacts related to recycling materials, fuel and energy, and non-operational items including foreign currency translation and one fewer work day during the reported quarter. Sequentially, revenue decline 9.6% from $3,108.0 million.

Internal revenue growth from yield on collection and disposal business was 3.1%. Internal revenue growth from volume was negative 8.1%. Adjusting for the effect of one less work day during 1Q09, internal revenue growth from volume was negative 7.4%.

|Total Revenue ($M) |

|Positive |70.0%↓ |

|Neutral |30.0%↑ |

|Negative |0.0% |

|Avg. Target Price |$34.25 |

|Median |$34.50 |

|Digest High |$40.00 |

|Digest Low |$27.00 |

|No. of Analysts with Target Price/Total |8/10 |

Metrics detailing current management effectiveness are as follows:

|Metric (TTM) |Company |Industry |S&P 500 |

|Return on Assets (ROA) |4.9% |0.3%↑ |7.1%↑ |

|Return on Investment (ROI) |5.8% |0.4%↓ |9.8%↑ |

|Return on Equity (ROE) |17.4% |0.6% |20.2%↓ |

Capital Structure/Cash Flow/Solvency/Governance/Other [Note: Only highlighted material has been changed.]

Cash Flow

Cash flow from operating activities was $519 million in 1Q09, down from $561 million in 1Q08. Capital expenditures were $325 million, higher than $213 million in 1Q08. Free cash flow as reported by the Company was $199 million in 1Q09 versus $362 million in 1Q08.

For FY09, management expects capital expenditure to be in the range of $1.1 billion-$1.2 billion and reiterated its free cash flow guidance of $1.3 billion-$1.4 billion.

Balance Sheet

Cash and cash equivalent at 1Q09 end was $947 million versus $480 million at 4Q08 end.

On February 23, 2009, WMI announced that it priced an underwritten public offering of $350 million aggregate principal amount of 6.375% senior notes due March 11, 2015, and $450 million aggregate principal amount of 7.375% senior notes due March 11, 2019, under a shelf registration statement previously filed with the Securities and Exchange Commission. The notes will be fully and unconditionally guaranteed by the Company's wholly-owned subsidiary, Waste Management Holdings, Inc. The notes have been assigned ratings of BBB by both Standard & Poor's and Fitch and Baa3 by Moody's. The Company plans to use the proceeds of the offering to repay $500 million of senior notes that mature in May 2009 and use the remainder of the proceeds for general corporate purposes, which may include repaying some or all of the borrowings outstanding under its credit facility.

Dividends

On June 19, 2009, WMI paid a quarterly cash dividend of $0.29 per share to stockholders of record on June 1, 2009.

On March 20, 2009, WMI paid a cash dividend of $0.29 per share to stockholders of record on March 9, 2009.

The Company made a dividend payment of 143 million in the reported quarter.

Restructuring

The Company announced a reorganization program that will cost approximately $50 million for implementation, but will result in annualized savings.

Savings will result from the following:

• The restructuring of the field operation will be through consolidation, and will likely reduce market areas from 45 to 25, eliminating duplicative functions;

• The realignment of the corporate staff to more efficiently support the new field operations;

• The elimination of CY09 merit-based salary increases for salaried exempt personnel, unless a turnaround in the economy and the business is seen; and

• The merit-based pay process for hourly personnel will get delayed till June 30, 2009.

Cost savings totaling approximately $20 million were realized for the months of February and March and management expects annualized savings to exceed $120 million. A charge of $38 million was incurred for this restructuring and up to $15 million of additional charges are expected to be incurred in 2Q09 and 3Q09.

According to one firm (MorganStanley), management considers the recent bout of cost cutting to be permanent, suggesting considerable operating leverage going forward.

Others

On February 03, 2009, the Northeast Maryland Waste Disposal Authority, in conjunction with the Frederick County Division of Utilities and Solid Waste Management and Carroll Country Department of Public Works, selected Wheelabrator Technologies Inc., a wholly owned subsidiary of WMI as the preferred vendor to construct and operate a new, regional waste-to-energy facility that will serve the solid waste disposal and energy needs of Frederick and Carroll Counties. The facility, which will be the first new Greenfield waste-to-energy plant to be constructed in the U.S. in more than a decade, will be located in Frederick County.

June 29, 2009

Potentially Severe Problems [Note: Only highlighted material has been changed.]

There are none other than those discussed in other sections of this report.

May 14, 2009

Long-Term Growth [Note: Only highlighted material has been changed.]

Long term growth rates range from 9.0% (Argus Fundamental Research) to 10.0% (Raymond James) with an average of 9.5%.

In the long term, WMI’s growth is seen to be governed by (a) internal growth volumes and prices, (b) acquisitions, and (c) extent of savings from cost-cutting initiatives.

Collection and recycling businesses continue to grow income from operations at double-digit rates, and management will continue to follow the strategy of pricing work to generate acceptable margins and returns on the business. The Company is making steady progress with regard to the pricing program and will continue to produce a positive price-volume trade-off in the collection business. WMI is committed to this approach, and expects this to drive earnings growth and margin expansion. The Company intends to follow a disciplined approach to landfill pricing and to pursue cost cutting at landfills to offset the earnings impact of the loss in volumes in the long run.

Given the company’s strong cash flow generation, management is looking for new growth opportunities. Within the solid waste market, the company is looking to pay 5.5-6x EBITDA multiples for tuck-ins where they can gain meaningful synergies. Waste to Energy (WTE) is likely to grow mainly through partnerships and joint ventures, both domestically and overseas, with significant opportunities in China and the UK. Management is looking for projects with 11%-16% unlevered IRRs. Medical Waste appears to be an area that management would be willing to pursue opportunistically if a business is available for the right price, given the relatively high returns in the area.

The firms believe WMI is successfully introducing fuel surcharges and other fees into its existing contracts in some cases, which supplements core price gains. WMI renegotiated agreements with half of its contract base versus less than 25% as of the end of 2007, and the firms expect the benefit from contract revisions to extend into 2010, given the duration of some agreements.

The firms believe solid pricing combined with a focus on flexing down costs in the face of declining volumes and operating more efficiently will lead to continued margin improvement in the foreseeable future.

One firm (Gabelli) expects return on capital to increase due to improved incentive program and pricing, in turn driving earnings growth of 15% over the next 3-5 years.

Longer term, one firm (MorganStanley) believes that management remains committed to repurchasing shares and reducing debt should rates significantly increase.

June 29, 2009

Upcoming Events [Note: Only highlighted material has been changed.]

None

Individual Analyst Opinions [Note: Only highlighted material has been changed.]

POSITIVE RATINGS (70.0%)

Argus Fundamental Research (updated 05/13/09) - The stock is rated Buy with a target price of $34.00. INVESTMENT SUMMARY: The firm believes that he Company is performing well in the current operating environment, as price increases continue to offset planned volume reductions. Though the firm expects a slowdown in the recycling unit in the near term, at the same time it believes that the Company will benefit from restructuring initiatives.

Gabelli (updated 06/05/09) - The stock is rated Buy with no specific target price. INVESTMENT SUMMARY: Despite an expected decline in profit during 2009, the firm expects solid cash flow, rising return on capital, and potential catalysts to be attractive; and hence, continues to recommend Buy.

Wunderlich Securities (updated 05/14/09) – The stock is rated Buy with a target price of $40.00. INVESTMENT SUMMARY: According to the firm, WMI has focused on compensation incentives across the management structure, which had the obvious affect of improving ROIC and free cash flow. The firm believes that, the value drivers of WMI’s strategy are pricing discipline and incremental top-line growth from non-traditional solid waste segments like waste-to-energy (WTE) and medical waste.

BAS-ML (updated 06/23/09) – The stock is rated Buy with a target price of $34.00. INVESTMENT SUMMARY: The firm believes WMI stands to benefit from favorable price growth, given its leading share of landfill capacity in the United States, presence in competitive markets that allow for significant pricing power, and its efficient cost structure.

Deutsche Bank (updated 04/29/09) – The stock is rated Buy with a target price of $36.00.

First Analysis (updated 04/30/09) - The stock is rated Overweight with a target price of $35.00. INVESTMENT SUMMARY: The firm considers the Company to be well positioned to capture new volumes at high incremental margins when the economy improves. The firm believes this insulation from a weak economy, combined with leverage to an improving economy, makes the stock attractive in a highly uncertain macro environment.

Raymond James (updated 04/30/09) - The stock is rated Outperform with a target price of $35.00.

NEUTRAL RATINGS (30.0%)

Goldman (updated 02/13/09) – The stock is rated Neutral with a target price of $27.00.

J.P. Morgan (updated 06/01/09) – The stock is rated Neutral with a target price of $33.00. INVESTMENT SUMMARY: Though the firm believes that WMI will continue to deliver price-driven margin gains and EBITDA growth, it at the same time sees small potential for outsized multiple expansion relative to other names under its coverage.

MorganStanley (updated 06/23/09) – The firm initiated coverage on the stock with an Equal Weight rating and no specified target price. INVESTMENT SUMMARY: Although WMI’s stock recently lagged behind its peers, the firm sees longer term competitive advantages related to scale, brand image, and technology. However, the firm believes that cyclical forces, such as industrial weakness and softer commodity prices cloud the near-term picture and keep the investors on sidelines, given the current valuation.

NEGATIVE RATINGS (0.0%)

None

|Research Associate |Binod Kr. Das |

|Copy Editor |Avishek Mishra |

|Content Ed. |Avishek Mishra |

|No. of brokers reported/Total| |

|brokers | |

|Reason for Update |Flash |

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Zacks Research Digest

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