Is the Worst Over for Waste Management?
By Jeff Bronchick
Special to TheStreet.com
5/18/00 7:05 AM ET
Until very recently, value managers have been at the low end of the totem pole. It obviously follows that many value stocks have also been hurting. Pardon my gross oversimplification, but if I had to pick one stock besides Philip Morris (MO:NYSE - news) that has caused more pain for the value camp, it would probably be Waste Management (WMI:NYSE - news).
Having carried out many a money manager with the trash, I'm wondering what is to be made of its recent first-quarter earnings report, which sparked a 20% pop in the stock. Does that mean we've seen the bottom?
I once read a long time ago that growth managers put up great numbers via astute selling, i.e., getting off the bullet train before the wreck. Value managers succeed by smart buying, i.e., they avoid being terribly early.
Needless to say, it has helped my performance a lot to avoid the Waste. And it's been on the radar screen a long time. You couldn't help but notice the "who's who" of value managers who appeared to have taken a shot at this stock since the price had a 4 in front of it. But despite last week's suggestion that there is often opportunity in confusion, in this case the stink was so pervasive that my conclusion was that there has to be an easier way to make money -- words that every investor should repeat to himself at least a few times a year.
So the quarters went by, and the goo got thicker. To go line by line through a recap of the mess Waste has found itself in would dent even George Gilder's bandwidth projections, so I will stick to some generalizations because, frankly, I'm still working through the numbers.
There were serial mergers at ridiculous prices, zero in the way of financial controls (which produced erroneous financial statements), management excess and waste, etc., etc. But unlike a dot-com that could disappear tomorrow, Waste owns miles and miles of semi-filled holes of stinking garbage-collecting revenue under its corporate banner. Environmentalism is not going away, which means, at least conceptually, that it gets harder and more expensive each year to dig another hole, line it with thick plastic and start dumping garbage into it.
Signs of a Bottom
It appears at first blush that the firm's first quarter was the first quarter in recent memory that wasn't dismally worse than expectations. It also appears that this is a stock that a lot of people would like to own, or recommend. But these are the same people who also did not want to be the latest victims to be wrapped in old newspaper and tossed in the East River by trying to call the bottom. So at the first whiff of an uptick, the analysts piled on to raise ratings and, with the sellers probably exhausted by their efforts to blow the stock out at the bottom, it didn't take much to send it higher in the very short run.
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The first question regarding Waste Management is: Can you finally trust the numbers?
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That said, it's tough to say there was any glimmer of real improvement in the quarter, with the exception of a decline in outstanding receivables and further illumination of the dollars behind a stream of asset sales.
The first question regarding Waste Management is: Can you finally trust the numbers? This company has gone through more restructurings and earnings restatements than any company I have seen in 17 years in the investment business that has not subsequently gone bankrupt.
This makes the analysis of Cendant (CD:NYSE - news) seem like kindergarten work. I am not sure the use of the word fraud is merited, but obviously some investors feel that way, given the amount of outstanding lawsuits. Clearly there have been some ugly and not-so-funny things occurring under former management's nose.
Although it has taken two-and-a-half sets of management to get there, there appears to be some stability in the reported numbers. According to the latest quarterly report:
As previously reported in the Company's Form 10-Q for the quarter ended September 30, 1999 and the Company's Form 10-K for the year ended December 31, 1999, the Company concluded that its internal controls for the preparation of interim financial information during 1999 did not provide an adequate basis for its independent public accountants to complete reviews of the 1999 quarterly financial information in accordance with standards established by the American Institute of Certified Public Accountants
The Company believes that the processes it used for the preparation of its March 31, 2000 interim financial statements have improved. In addition, the Company has committed substantial resources to mitigate the previously identified control weaknesses. Management believes these efforts have enabled the Company to produce timely and reliable interim financial statements as of March 31, 2000 and for the three months then ended. Management further believes that its processes will continue to improve throughout 2000, allowing it to reduce its reliance on the use of external resources as mitigating controls, although there can be no assurance that this will be the case.
This is not exactly a ringing vote of confidence, but it is much better than the abyss the company found itself in during much of last year. And yes, it seems pathetic -- in this day and age of questionable accounting practices -- to applaud the fact the company can finally produce financial statements that pass muster. But a turnaround has to start somewhere.
So putting aside questions about the reported financial statements, the eight-figure shareholder lawsuits, the uncertainty of the cash to be generated from intended asset sales, environmental issues and the mountain of debt, is Waste worth looking at?
That's the easy question, so I'll say yes. The original premise is that the waste business gushes cash, and there are some regional monopoly issues that can be turned to shareholders' advantage. Waste has a whole posse of new managers that is doing the correct blocking and tackling -- and luckily for them, there have already been several years of disasters in which to weed out lurking problems. I have prepared some very preliminary numbers that indicate the stock appears absurdly cheap -- even with the aforementioned shoes to drop. And getting back to my original thought, it is difficult to find a more hated stock that Waste Management. (OK, there is Conseco (CNC:NYSE - news).)
But eventually, those who can't stand the heat sell at miserable enough prices to make a bottom, which is invariably well before the fundamentals show up in the quarterly earnings report. In any event, it appears like it's time to do the work here and make a decision. Opinions from garbage hounds are welcome.
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Jeffrey Bronchick is chief investment officer of Reed Conner & Birdwell, a Los Angeles-based money management firm with $1.2 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Fund. At time of publication, neither Bronchick nor RCB held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at jbronchick@rcbinvest.com. |
