I bought a starter position in AW.
The negatives are that AW has a great deal of debt. But I believe their debt level is manageable considering the fact that they will generate over 400 million dollars in free cash flow this year. They are also in a dispute with the IRS which could be a surprise negative if they lose their hearting.
The positives are that the company is the second largest owner of landfills which insulates the company from a great deal of competition. AW has a 70 percent internalization rate which allows it to be increase their margins. Below is a quote from a recent International Herald article on the "greening" of the waste industry.
"In the United States, for instance, large hauling companies have slowly pushed smaller concerns out of the way by leveraging their economies of scale. As a result, the waste management sector has been whittled down into an oligopoly shared largely by four big public companies: Waste Management, Waste Industries, Allied Waste Industries and Republic Services. The consolidation has produced a "healthy, functioning" industry, said Nelson of Morningstar, that will be fairly insulated from recession."
Furthermore landfills are becoming a increasing source of income because of the methane gas that is produced.
To Morningstar's Nelson, "extracting methane gas to power neighboring homes is something important to society and great public relations move." It also, he said, is a way for established industry players, like Waste Management and Allied Waste Industries, to make optimum use of existing landfill properties.
Allied Waste Industries has 52 landfill gas-to-energy projects under way in the United States, including 41 electric-generation plants, and another 17 projects in the permit stage or under construction. Its rival, Waste Management, announced plans in September to build 60 landfill gas conversion facilities in the United States over the next five years. The plants are expected to generate 700 megawatts of electricity or enough to power 700,000 homes. Waste Management is aiming for a brisk internal rate of return of 15 percent, which Nelson said was "achievable."
This Morningstar report details the plusses and negatives for the company.
biz.yahoo.com
Below is the company's latest investor presentation.
library.corporate-ir.net
I also own RSG and WMI. I purchased them seven or eight years ago. I've decided to add AW to my sector holdings.
I think there will be continued changes in the waste industry. Changes are already occurring in Europe. High commodity prices and limited landfill space will result in higher recycling requirements. Already, recycling is 2% of Waste Management's gross revenues. I expect that to increase for all of the companies. |
