Waste Management, Inc.

February 18, 2015

Waste Management, Inc.

Current Recommendation

Prior Recommendation Date of Last Change

NEUTRAL

Underperform 11/14/2011

Current Price (02/17/15) Target Price

$53.94 $57.00

SUMMARY DATA

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

P/E using TTM EPS

P/E using 2015 Estimate P/E using 2016 Estimate

Zacks Rank *: Short Term 1 3 months outlook

* Definition / Disclosure on last page

$53.94 $40.41

26.30 0.67

2,130,925

458 $24,700

8.18 78 1

$1.50 2.78

3.9 2.3 4.1

21.8 21.1 19.3

3 - Hold

(WM-NYSE)

SUMMARY

Waste Management reported strong fourth quarter 2014 results with a year-over-year increase in earnings. The company is continuing with its restructuring initiatives, which are likely to reap benefits in the long run. Waste Management is also taking adequate measures to improve its yield and at the same time remains focused on controlling its costs. The company continues to return significant cash to shareholders through dividend and share repurchases. However, high market price volatility and huge integration costs related to acquisition could impair its long-term profitability to some extent. Nevertheless, we maintain our long-term Neutral recommendation for the stock.

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Low,

Large-Growth Waste Removal S

171 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Mar)

(Jun)

2013 2014 2015 2016

3,336 A 3,396 A 3,229 E

3,526 A 3,561 A 3,426 E

Q3 (Sep)

3,621 A 3,602 A 3,476 E

Q4 (Dec)

3,500 A 3,437 A 3,406 E

Year (Dec)

13,983 A 13,996 A 13,537 E 14,089 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2013 2014 2015 2016

$0.40 A $0.49 A $0.49 E

$0.54 A $0.60 A $0.64 E

$0.65 A $0.72 A $0.74 E

$0.56 A $0.67 A $0.68 E

$2.15 A $2.48 A $2.55 E $2.79 E

Projected EPS Growth - Next 5 Years %

8

? 2015 Zacks Investment Research, All Rights reserved.



10 S. Riverside Plaza, Chicago IL 60606

OVERVIEW

Headquartered in Houston, Texas, Waste Management Inc. is the largest provider of comprehensive waste management services in North America. The company provides collection, transfer, recycling and resource recovery, as well as disposal services to nearly 20 million residential, commercial, industrial and municipal customers. It is also a leading developer, operator and owner of waste-to-energy and landfill gas-to-energy facilities in the U.S.

Currently, Waste Management has five operating groups, including Eastern, Midwest, Southern, Western, and the Wheelabrator. The Wheelabrator group includes the company s waste-to-energy facilities and independent power production plants. The company also has a joint venture with Linde Group, which includes plant that converts landfill gas into liquefied natural gas for use as fuel in the company s trucks.

REASONS TO BUY

Waste Management is well executing its initiative to refocus on the core business activities and instill price and cost discipline to achieve better margins and returns in the long run. The company aims to focus on improving customer retention by providing customers with better service and higher value solutions. Waste Management and leveraged buyout fund advisor aPriori Capital Partners L.P. recently inked a joint venture agreement to facilitate the acquisition of Deffenbaugh Disposal, Inc. by one of the subsidiaries of the waste management firm for an undisclosed amount. With 1.7 million tons of waste and recyclable material collections in 2013, Deffenbaugh is a strategic fit for Waste Management and will enable it to focus on its core businesses. At the same time, the transaction enables Waste Management to extend its geographic footprint and make a foray in the attractive market of Kansas City, where it has limited presence. A steady stream of accretive acquisition is likely to drive earnings for the company in future.

The company has strong cash flow generating characteristics, a dominant market capitalization, and a steady annual dividend policy. Waste Management plans to return significant cash to shareholders through healthy dividends and share repurchases in the future quarters as well. Waste Management intends to increase its dividend by $0.04 to $1.54 per share on an annual basis for approximately $700 million. Also, the company has authorized a share repurchase program of up to $1 billion. The company remains focused to invest on assets that fit within its long-term strategy. It is likely to successfully divest several non-core operations for core business focus and high liquidity.

Waste Management expects yield improvement to continue in the company s solid waste lines of business and also expects good yield momentum in the forthcoming quarters. Earlier, the company inked an agreement to sell its Wheelabrator waste energy business to Energy Capital Partners for $1.94 billion. The proceeds from this divestiture will be utilized for additional attractive acquisitions in their core businesses, which are likely to be accretive in order to create long-term shareholder value. This augurs well for its long-term growth perspective.

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REASONS TO SELL

Waste Management s recycling operations process certain recyclable materials, including fibers, aluminum and glass, all of which are subject to significant market price fluctuations. The company is expected to face commodity price headwinds in future as well, which will likely have a negative yearover-year impact on earnings. The recycling line of business is expected to witness a negative headwind in the range of $0.03 $0.05 per share in 2015.

The company s exposure to market price volatility on electricity has increased over the last few years as long-term power purchase agreements have expired. Also stringent government regulations are likely to restrict operations and compliance with such regulations increases the operating costs for the company. In order to develop or operate a landfill or any waste management facility, facility permits and other governmental approvals are necessary. These permits and approvals are often difficult to obtain, time consuming and costly and could restrict its operations. All these are likely to impact the company s profitability in the long term.

The company expects volumes to be down due to lower national counts as they strive for improved margin growth and pricing. The pricing environment remains challenging and highly competitive due to aggressive bidding by smaller competitors. The company needs to improve margins on the recycling side through adjustment of rebates to reflect lower pricing and also needs to improve the quality of inbound material to improve profitability.

RECENT NEWS

Waste Management Q4 Earnings Beat, Revenue Estimates Miss December 31, 2014

Waste Management reported net income of $590 million or $1.28 per share in the fourth quarter of 2014, reviving drastically from net loss of $605 million or loss of $1.29 per share in the year-ago period. The increase in earnings was driven by strong pricing and cost control initiatives.

Full year 2014 net income per share stood at $2.79 per share versus $0.21 per share in 2013.

Excluding one-time items, adjusted earnings per share (EPS) stood at $0.67 in the reported quarter versus EPS of $0.56 in the year-ago period. The adjusted earnings exceeded the Zacks Consensus Estimate of $0.61.

Excluding one-time items, adjusted earnings per share (EPS) stood at $2.48 in full year 2014 versus EPS of $2.15 in 2013. For full year 2014, the adjusted earnings exceeded the Zacks Consensus Estimate of $2.41 per share.

Quarter in Detail

Revenues for the fourth quarter of 2014 stood at $3,437 million versus $3,500 million in the year-ago period. The reported revenues lagged the Zacks Consensus Estimate of $3,502 million. The decline in revenues was related to divestiture of operations and the impact of foreign currency translation.

Revenues for the full year 2014 stood at $14.00 billion versus $13.98 billion in 2013.

Internal revenue growth from yield (for collection and disposal operations) stood at 2.0% in the reported quarter.

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Core price (including price increases and fees, other than the company s fuel surcharge, net of rollbacks) was 3.9% in the reported quarter.

Internal revenue growth from volume reported a decline of 0.8% in the reported quarter.

Revenues from the company s Collection business decreased to $2,107 million in the reported quarter from $2,132 million in the year-ago period. Landfill revenues improved marginally by 3.1% to $727 million from $705 million in the prior-year period. Recycling revenues declined to $321 million from $356 million, while Transfer revenues were up by $4 million to $336 million. Wheelabrator revenues were down 16.6% to $176 million.

Operating expenses improved by $97 million in the reported quarter to $2170 million. The savings were driven by reduced costs and other expenses.

Financials

Cash and cash equivalents stood at $1,307 million as of Dec 31, 2014 versus $58 million in Dec 31, 2013. Long-term debt (less current portion) stood at $8,345 million as of Dec 31, 2014 versus $9,500 million in Dec 31, 2013.

Net cash provided by operations for twelve months ended Dec 31 2014 stood at $2,331 million versus $2,455 million in the prior-year period. Capital expenditure stood at $1,151 million for twelve months ended Dec 31, 2014 versus $1,271 million in the prior-year period.

Free cash flow stood at $3,433 million at Dec 31, 2014 versus $1,322 million in the year-ago period.

For the full year 2014, the company returned $1.29 billion to shareholders, consisting of $693 million in dividends and $600 million in stock repurchases.

Outlook

Waste Management expects adjusted earnings per share in 2015 to be in the range of $2.48 and $2.55 per share, an increase of 8% 11%. Free cash flow is expected to be in the range of $1.4 $1.5 billion. Proceeds from divestitures are expected to be in the range of $50 $100 million. Internal revenue growth from yield on the collection and disposal business is expected to be 2.0% and internal revenue growth from volume is expected to be between negative 0.5% to flat. Core price is expected to be approximately 3.8%. Capital expenditures are expected to be approximately $1.2 $1.3 billion.

Waste Management intends to increase its dividend by $0.04 to $1.54 per share on an annual basis for approximately $700 million. Also, the company has authorized a share repurchase program of up to $1 billion.

Going forward, Waste Management expects to continue with its pricing and cost efforts. However, the recycling line of business is expected to witness a negative headwind in the range of $0.03 $0.05 per share in 2015.

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VALUATION

At its current price, Waste Management s trailing 12-month earnings multiple is 21.8, compared with the 21.3x average for the peer group and 19.3x for the S&P 500. Over the last five years, the company s shares have traded in the range of 14.7x to 21.7x trailing 12-month earnings. The stock is trading at a discount to the peer group based on forward earnings estimates. We maintain our long-term Neutral recommendation on the stock as we anticipate it to perform in line with the broader market. Our target price of $57.00 or 22.4 x 2015 EPS factors in this view.

Key Indicators

Waste Management Inc. (WM)

P/E F1

21.1

P/E F2

19.3

Est. 5-Yr EPS Gr%

8.1

P/CF (TTM)

8.2

P/E (TTM)

21.8

P/E 5-Yr High (TTM)

21.7

Industry Average S&P 500

23.3 23.8

12.5

16.7 15.6

10.7

10.0 21.3 58.8 15.3 19.3 19.4

RINO International Corporation (RINO)

10.0

Trailblazer Resources, Inc

Republic Services, Inc. (RSG)

19.4 17.5

6.1

8.3

20.1 20.6

Clean Harbors, Inc. (CLH)

28.2 23.6

12.0

7.6

31.0 36.5

TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

P/E 5-Yr Low (TTM)

14.7

26.3 12.0

0.0

13.0 15.6

Waste Management Inc. (WM)

Industry Average S&P 500

P/B Last Qtr.

4.2

P/B 5-Yr High

4.2

2.4

2.4

5.3

9.8

P/B 5-Yr Low

2.2

2.4 3.2

ROE (TTM)

18.6

2.2 25.5

D/E Last Qtr.

1.6

0.7

Div Yield Last Qtr.

2.8

0.8 2.1

EV/EBITDA (TTM)

11.2

5.8

Equity Research

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