Services Sector Ideas

[gfp927z]

Waste Management Sector -- >>> 4 Waste Removal Stocks With High Valuations to Avoid Now, 2 to Watch



By Bill Edson

November 6, 2012

Tickers: CVA, RSG, SRCL, WCN, WM



http://beta.fool.com/billedson11/2012/11/06/cashing-trash-are-these-6-junk-stocks-buys/15860/?ticker=SRCL&source=eogyholnk0000001




As dirty as their businesses are, many waste management companies are not trading like garbage. Even the temporary service interruption of Hurricane Sandy did not drop valuations significantly. In fact, in its aftermath many of these stocks are trading at very dear multiples. So do investors today love trash? Investors should exercise care to make sure they are not overpaying for waste industry stocks.

Dumpster Diving

At roughly $32 per share Waste Connections (NYSE: WCN) fails to provide investors a discount for buying a waste management stock. In addition to typical waste services, including waste collection, disposal, and recycling, the company is a leading provider of non-hazardous oilfield waste treatment, recovery and disposal services in several of the most active natural resource producing areas in the United States, including the Permian, Bakken, and Eagle Ford Basins.

Investors can buy more revenues per dollar from the S&P 500, since this stock has a much higher 2.55 price-to-sales ratio, while the index has a ratio of 1.29. Waste Connections shares currently trade at a high 24.01 price-to-earnings ratio, a higher value than the 14.1 price-to-earnings ratio average of the S&P 500 index. Shares trade at a 2.20 price-to-book ratio, which is near the 2.05 average of the S&P 500. The firm is not over-leveraged based on its reasonable 0.54 debt-to-equity ratio.

Covanta (NYSE: CVA) is a waste-to-energy mid cap stock trading at glamor valuations. At a price of roughly $18, Covanta shares are trading at a rich 27.39 price-to-earnings ratio, more than twice the 14.1 average of the S&P 500. Unfortunately, enthusiasm for generating energy trash burning doesn’t make up for the high price-to-earnings multiple.

Covanta’s dividend payments offer little solace. Sure, this stock pays a hefty 3.30% dividend, which is about twice the 10-year treasury yield. However, the firm's 0.85 payout ratio is shaky since this leaves very little room for adverse events and scarce funds for reinvestment to grow the firm.

Shares of Stericycle (NASDAQ: SRCL) are are trading at roughly $95 per share. Investors can buy more than three times the revenues per dollar invested from the S&P 500, since index has a price-to-sales ratio of 1.29 while this stock has a much higher 4.43 ratio. Stericycle shares are trading at a high 31.37 price-to-earnings ratio, a price multiple more than four times the 14.1 P/E ratio of the S&P 500. Even the 5.57 price-to-book multiple of this stock dwarfs the 2.05 S&P 500 price-to-book ratio. This stock is trading like a Silicon Valley growth technology stock, rather than a stock that disposes of healthcare waste.

Shares of Waste Management (NYSE: WM) are also not fairly priced at $32 per share. This stock has been flat over the past year. Waste Management shares are trading at a fair 17.33 price-to-earnings ratio, in line with the S&P 500 average. Shares trade at a 2.43 price-to-book ratio, which is near the 2.05 S&P 500 average. The only price multiple that is in favor of Waste Management is the price-to-sales multiple: the stock's 1.12 P/S multiple is below the 1.29 average of the S&P 500.

Republic Services (NYSE: RSG) has received media attention based on share purchases by Bill Gates. Fortunately, the press coverage has not inflated the price of the stock to insane valuations. At a $26 price level, the firm's 1.27 price-to-sales ratio is in line with today's prevailing market multiples. Republic Services shares are trading at a fair 15.46 price-to-earnings ratio, in line with the S&P 500. The price-to-book multiple of this stock is 1.34, cheaper than the 2.05 S&P 500 average. Republic Services shares are also attractive for income based on a dividend yield of 3.30%, and have a sustainable 0.49 payout ratio.

Investors might want to steer clear of this stock until it grows into its dividend policy. Its high 4.30% dividend yield requires a 0.70 dividend payout ratio. This leaves very little earnings as a cushion for failure and scarce funds for reinvestment.

Fortunately, some waste management firms trade at reasonable valuations. One such stock Darling International, which is trading at a $16 price level. The firm's 1.14 price-to-sales ratio, 14.00 price-to-earnings ratio, and 1.96 price-to-book ratio are midrange in today's market. The firm is also opportunistically growing its food waste recycling empire by acquiring assets.

Investors can also look beyond publicly-traded stocks for reasonably priced investment opportunities in waste management. Small ventures like JunkIt are reinventing the trash business. Rather than focus on repeat utility-like service, JunkIt focuses on special order and one-time disposal jobs around Toronto. The firm offers different levels of service, from dumpster pick up to in-home removal. Growth in this industry can come from other innovative combinations of cleaning services and waste disposal.

Conclusion

Value investors dumpster dive for out-of-favor stocks to find cheaply-valued companies. Often the companies they find are considered disgusting or irrelevant for most investors. Value investments are the cigar butts or garbage in the world of financial assets; but at today’s prices, these garbage companies are not value investments.

Investors seeking value investments should keep an eye on Darling International and Republic Services. They are trading at reasonable valuations and could hit compelling valuations after small price declines.

<<<