Myers: Waste Management on track
Restructuring part of chairman's 3-year turnaround plan
By Lisa Sanders, CBS.MarketWatch.com
Last Update: 4:36 AM ET March 9, 2002
HOUSTON (CBS.MW) -- Waste Management, once mired in an accounting quagmire and scorned by investors, isn't the investment pariah it once was.
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But, due to the company's past, the analyst community closely scrutinizes each move it makes. See more about Waste Management's history. On Monday, Waste Management, the nation's largest trash hauler, announced a restructuring and the elimination of 2,000 jobs. The new organizational structure eliminates one layer of management -- or two administrative staff levels -- and is expected to result in $100 million in yearly savings once complete.
To account for the reorganization, Waste Management will take a $50 million, or 5 cents a share, pre-tax charge in the first quarter of 2002 and take charges for an additional $75 million during the rest of the year. Waste Management (WMI: news, chart, profile) did not change its financial outlook for 2002.
"We've been working on this for over a year," said Chairman A. Maurice Myers in an interview with CBS.MarketWatch.com. Myers, known for his turnaround work at Yellow (YELL: news, chart, profile) and America West (AWA: news, chart, profile), was hired by Waste Management in November 1999. See earlier interview with Myers. At the time, Myers, who also holds the titles chief executive and president, said it would take three years to fix the company, and as of Wednesday, he said the plan remains on track.
The job cuts don't come as a shock, said Jaimi Goodfriend, an analyst at First Analysis. But she said there's inherent risk in changing the levels of field management. Goodfriend recommends investors "accumulate" the stock.
"The question is how quickly they can integrate the new management structure," she said. "It's a wait-and-see type of move. While I believe in cost-cutting strategies -- they had a higher cost structure than their peers -- again, changing management at the field level could take some time to implement."
Deutsche Banc Alex. Brown downgraded Waste Management on Feb. 25 to "buy" from "strong buy" after a fourth-quarter warning and the firm's own analysis brought on concerns about the company's ability to significantly expand margins, the basis for the higher recommendation.
Acknowledging the downturn in the economy, analyst Stacy Devine wrote in a note to clients: "a shortfall for Q4 2001 and 2002 would still have likely occurred as the level of expected improvement from the turnaround...was not being achieved."
Waste Management does not comment on analysts' reports, a company spokesperson said.
After Waste Management's restructuring announcement, which Deutsche Banc expected, Devine wrote "we remain relatively cautious in the near-term as we believe that the reduction of a middle-management layer in the field could cause near-term disruption."
Myers conceded that analyst concerns about disruption were appropriate.
"Whenever you make changes, there is that potential," he said. "I remind them that we've had two years of disruptions, and turning around a company like this is a major disruption. The main thing is the culture change, and I think it's going well."
So does Ralph Whitworth, managing member of Relational Investors LLC. The firm took a position in Waste Management in 1997 and added 2.5 million shares in December, bringing its total stake in the company to 4.6 million shares.
"I think they're still on plan," he said. "They're focused on the right things such as cost reductions and margin improvements, and now the company's been stabilized for the last couple of years. We've shown a strong vote of confidence by buying shares and we're very committed to the company."
On Monday, the day of the restructuring announcement, Waste Management stock closed higher than in the previous session. It remained in a range of $27 to $28 for the rest of the week, closing Friday at $27.46.
Myers, whose first year was spent doing what he called basic repair work and whose second year consisted of improving productivity to turn the company into an efficient machine, said the downturn in the economy has to be given some weight.
"This business has typically been called recession resistant -- every person in the U.S. produces 4.5 pounds of trash a day -- but on the other hand, we're not recession proof," he said. "As business deteriorates, our commercial customers feel the pinch and that has an impact. We expect business to be slow through the first half."
He argued that a better measure of Waste Management's success is its free cash flow, which amounted to more than $1 billion in 2001. The company expects the same result this year.
"We said it would be a three-year turnaround, and we feel we're very much on target in terms of everything we're doing," Myers said.
Goodfriend remains confident in Myers' leadership abilities, and she thinks Waste Management is a great stock for the long-term investor.
But "the light at the end of the tunnel is still the light at the end of the tunnel," Goodfriend said. "That doesn't mean he's not doing a great job, and the idea was that it would be a long-term change. But there was some hope that it would be quicker."
Lisa Sanders |
