This story appears in the May issue of SmartMoney magazine.
By David Stires
Stinky as its business may seem now, Waste Management was once at the top of the heap on Wall Street. With an aggressive acquisition strategy, the garbage hauler had become the nation's largest as far back as the '80s. It was also the most profitable,squeezing double-digit earnings gains out of the slow- growth trash business.
But to maintain its furious growth rate through the 1990s, the firm made several largely unsuccessful attempts to branch out beyond its basic collection and disposal business into hazardous waste disposal, recycling and water treatment. Worse, it even lost market share to nimbler competitors in its core business.
Then the real slide began. In February 1998, then CEO Robert Miller admitted that Waste Management had overstated earnings
since 1992. The company had depreciated its trucks and dumpsters too slowly, a move calculated to lower annual expenses. By the time management announced a special charge of $3.5 billion, Wall Street had cut the company's market capitalization nearly in half. One month later, the top brass agreed to a $13.5 billion takeover by USA Waste Services, a Houston company one-third
Waste Management's size.
Although investors expected the accounting irregularities to be resolved by the merger, the new Waste Management struggled to clean up its books. An earnings shortfall last July expanded to become a comedy of revised forecasts, accounting restatements and resignations. Then the company took a $1.2 billion third- quarter charge to write down the value of landfills and other assets. The result: At $14, Waste Management shares are down more than 75 percent from their 52- week high and languishing in Wall Street's trash bin.
In the rush to dump the company's stock, however, investors may have overreacted. Waste Management has amassed an
unrivaled network of 300 landfills that handle over 40 percent of the nation's garbage-business into which competitors are unlikely to venture. And since the board appointed a new chief executive in November, some of the nation's most respected fund managers, Legg Mason superstar Bill Miller among them, are betting the garbage giant is ripe for a turnaround.
The company has the best landfill and garbage-collection assets in the industry, according to Mason Hawkins, whose
top-performing Longleaf Partners fund has a whopping 16 percent of its assets in the stock.
Buyers like Hawkins and Miller are fans of the new CEO, Maurice Myers, 59. He's fresh from Yellow Freight, one of the
nation's largest trucking companies. "[Myers] brings the professional experience and operating discipline Waste Management sorely needs," says Raymond James analyst William Fisher, a three-time Wall Street Journal All-Star. He currently rates the stock a buy with a 12- month price target of $28 a share. Fisher points out that Myers joined Yellow in 1996 with the mandate to
fix a company that had lost money for three years in a row. "[They] returned to profitability within the first year," explains Deutsche Banc Alex. Brown analyst Stacy Gray, a two-time Journal All-Star who owns Waste Management shares in her personal account.
Myers, meanwhile, is off to a strong start. Already, he's named a new chief financial officer, general counsel and information technology director. Myers's team has begun disposing of noncore assets, such as far-flung international operations spanning Europe, Asia and South America. In mid-March the firm announced the sale of its Dutch holdings for $328 million. Proceeds from these sales should generate $3 billion by the end of this year; $2 billion of that will help pay down company debt of $12 billion, while the remaining $1 billion may fund a rumored stock buyback.
Management is also taking steps to make sure there are no more accounting surprises. William Trubeck, the new CFO,
previously held the same position at Honeywell and Northwest Airlines. And some 1,100 outside auditors are almost finished
combing the company's 800 operating districts to bring the books up to date. "The audit is of much greater scope than a normal one," says Gray at Deutsche Banc. "It makes me confident that the irregularities are behind them."
A bigger issue will be setting up the billing system to ensure the timely flow of financial data from the firm's regional offices to headquarters. To make sure that's done right, Myers has hired Thomas Smith, who overhauled the information systems at Yellow. "Having already been through such an exercise should dramatically enhance the learning curve," says Fisher at Raymond James.
Industry economics are certainly on Waste Management's side. Thanks to a crackdown on municipal landfills that don't comply with EPA regulations, the number of such dumps had shrunk to 2,300 in 1998, from 3,100 in 1996. "They have a real opportunity to improve pricing," says Fisher. Analysts estimate that industry earnings have a five-year average annual growth rate of 19 percent, and Waste Management might do even better. It has a market share three times that of its nearest rival, Allied Waste.
Optimists say free cash flow per share can exceed $4.50 in the next three years. With the industry's average multiple of nine
times cash flow, that means Waste Management could be selling at $40 a share. "The catalysts are a reinstatement of confidence in management and making the numbers," says Deutsche Banc's Gray. "They may not be able to do that this quarter, but over time they can." |
