Not to worry.
DJ Waste Management Off 31% On 2Q Warning, Downgrades
By Christopher C. Williams
NEW YORK (Dow Jones)-- Shares of Waste Management Inc. (WMI) plunged 31% after the pollution-control giant issued a negative second-quarter earnings outlook and a slew of analysts downgraded their ratings and earnings estimates for the company.
After an opening delay due to order imbalance, Waste Management was off 16 1/2, or 30.8%, at 37 1/16 on volume of 10.15 million shares, compared with average daily volume of about 2.6 million.
Late Tuesday Waste Management said it expects to report earnings of 67 cents to 70 cents a share for the second quarter, excluding merger related costs, compared with 41 cents last year. That projection was 8 cents below First Call's consensus for the company, which blamed a $250 million shortfall in North American revenue.
Waste Management pegged earnings for the full year at between $2.65 and $2.70 a diluted share, excluding merger-related costs, below First Call's projection of $3.01 a share.
Merrill Lynch, Credit Suisse First Boston, and Deutsche Banc Alex Brown are among the firms that lowered ratings on the stock Wednesday. Analysts say they expect Waste Management stock to languish until management explains fully the factors behind the revenue shortfall.
Douglas Augenthaler of CIBC Oppenheimer said Waste Management, among other things, is suffering problems integrating USA Waste Services and the old Waste Management. "It's a long fix," he said.
In downgrading the stock to a hold from strong buy, Michael Hoffman of Credit Suisse wrote in research notes "this gaff (by Waste Management) wipes out any regained credibility the new WMI had fostered" and the market won't "tolerate an inability to predict its business."
Other waste companies such as Browning-Ferris Industries Inc. (BFI), Republic Services Inc. (RSG) and Allied Waste Industries Inc. (AW) are also down in the wake of Waste Management announcement.
Augenthaler, however, said Waste Management's revenue shortfall is specific to the company. "It's not an industry problem," he said. "It's a Waste Management problem."
Recently, Browning-Ferris was off 15/16 at 42 5/8; Republic was down 2 7/16, or 10%, at 21 5/8; and Allied Waste was off 2 3/8, or 12%, at 18 1/4.
Analysts have lowered their 1999 earnings estimates for Waste Management to around $2.65 a share from around $3. For 2000 analysts are now expecting between $3 and $3.20, compared with First Call's consensus of $3.58.
Waste Management's downbeat second-quarter announcement is especially shocking because management has maintained for a while that it would be able to make the sharp ramp-up in second-quarter earnings. This news puts a significant dent in management's credibility and sullies the perception of the entire industry, some analysts say. Furthermore, some analysts are asking what it means for the industry that Waste Management, its price leader, is having trouble making its price increases stick.
Waste Management said in its release that revenue weakened toward the end of the quarter, but analysts are searching for further explanation.
Augenthaler of CIBC said "we are a bit skeptical" of Waste Management's comments regarding its prospects. "In an economic environment that is about as good as it can get, and with WMI leading the charge with price increases over the last six months, we suspect that the revenue shortfall is not an industry problem."
Augenthaler, who has a hold on the stock, warned of "other shoes to drop" and lowered his 1999 and 2000 "guesstimates" below the company's guidance. The analyst is now expecting Waste Management to earn $2.50 a share for this year and $2.80 for next. Augenthaler's previous estimates weren't immediately available.
Said Credit Suisse's Hoffman: "A revenue shortfall alone does not account for the missed expectation; margins are coming up 200 to 300 basis points short, too."
Waste Management is clearly experiencing integration problems it hasn't known about up to this point, the analyst said. Hoffman said his "best guess" to explain the revenue shortfall includes less internal growth, in both price and volume; less market-share gains linked to tuck-in acquisitions; and an increase in customer attrition.
Hoffman also said his free cash flow estimate drops to zero for this year from $400 million. "The 2000 cash flow is cut by at least $500 million," he said.
Merrill Lynch analyst William Genco, who cut his intermediate-term rating to neutral from buy, also figured that Waste Management, given its aggressive price increase, lost volume to competitor landfills.
Still, the analyst noted, the volume shortfall wasn't totally in geographic markets where there were significant price adjustments.
Officials of Waste Management weren't immediately available for comment.
- Christopher C. Williams; 201-938-5219
christopher.williams@dowjones.com |
