Options Trade – Waste Management, Inc. (NYSE:WM) Calls
Tuesday, February 18, 2014

**OPTIONS TRADE: Buy the WM Jul 2014 45.000 call (WM140719C00045000) at or under $0.90 (Max. of $1.00), good for the day. Place a protective stop limit at $0.35 and a pre-determined sell at $1.80.

by Ian Harvey

February 18, 2014

Introduction

Entry into the disposable waste service industry requires a huge amount of capital investment, an extensive amount of managerial experience, and of course some good luck. With such an extensive barrier to entry, you could say there is an economic moat surrounding the developed players in the waste industry.

Investing in monopolies or, in this case, an oligopoly can be very profitable for the individual investor in the long run. One such company that fits this category is Waste Management, Inc. (NYSE: WM).

Waste Management reports fourth-quarter results before the market opens February 18. The consensus estimate calls for WM to report quarterly earnings of $0.60 per share up from $0.57 during the same period last year. The stock has traded lower with the overall market in 2014, losing 4.4% year to date which allows for a good entry price for this options call!

Waste Management is expected to present a solid quarterly report. Trash and recycling is a consistent and stable business, and Waste Management is the biggest player in the sector. One of its biggest competitors, Republic Services (RSG), has already reported its quarterly results, and the numbers were upbeat.

Waste Management has done a good job recently cutting costs in order to keep margins increasing, despite a lack of growth in waste volume – therefore, recent cost-cutting measures should help keep its margins strong.

Company Details

Headquartered in Houston, Texas, Waste Management Inc. is the largest provider of comprehensive waste management services in North America. The company provides collection, transfer, recycling and resource recovery, as well as disposal services to nearly 20 million residential, commercial, industrial and municipal customers. It is also a leading developer, operator and owner of waste-to-energy and landfill gas-to-energy facilities in the U.S.

Currently, Waste Management has five operating groups, including Eastern, Midwest, Southern, Western, and the Wheelabrator. The Wheelabrator group includes the company's waste-to-energy facilities and independent power production plants. The company also has a joint venture with Linde Group, which includes plant that converts landfill gas into liquefied natural gas for use as fuel in the company's trucks.

Key Statistics for WM

Current P/E Ratio (ttm) 20.3605
Estimated P/E(12/2013) 19.9771
Relative P/E vs. SPX 1.1998
Earnings Per Share (USD) (ttm) 2.1448
Est. EPS (USD) (12/2013) 2.1860
Est. PEG Ratio 6.4442
Market Cap (M USD) 20,489.36
Shares Outstanding (M) 469.19
30 Day Average Volume 2,115,407
Price/Book (mrq) 3.0544
Price/Sale (ttm) 1.4649
Dividend Indicated Gross Yield 3.34%
Cash Dividend (USD) 0.3650
Dividend Ex-Date 12/02/2013
5 Year Dividend Growth 6.21%
Next Earnings Announcement 02/18/2014

Earnings

Waste Management (NYSE:WM) last announced its earnings results on Tuesday, October 29th. The company reported $0.62 earnings per share (EPS) for the quarter, meeting the consensus estimate of $0.62. The company had revenue of $3.62 billion for the quarter, compared to the consensus estimate of $3.60 billion.

During the same quarter in the prior year, the company posted $0.61 earnings per share. The company’s quarterly revenue was up 4.6% on a year-over-year basis. Analysts expect that Waste Management will post $2.19 EPS for the current fiscal year.

Analysts Opinions

Zacks reiterated their neutral rating on shares of Waste Management (NYSE:WM) in a research note released on Monday 27th January, 2014. They currently have a $44.00 target price on the stock.

Zacks’ analyst wrote, “Waste Management reported strong third quarter 2013 results with a year-over-year increase in both earnings and revenues. The company is continuing with its restructuring initiatives, which are likely to reap benefits in the long run. Waste Management is also taking adequate measures to improve its yield in the coming year and at the same time remains focused on controlling its costs. The company continues to return significant cash to its shareholders through dividends. However, high market price volatility, recycling operations headwinds, and huge integration costs related to acquisition could impair its long-term profitability to some extent. Nevertheless, we maintain our long-term Neutral recommendation for the stock”.

Separately, analysts at Macquarie initiated coverage on shares of Waste Management in a research note to investors on Tuesday, January 7th. They set an outperform rating on the stock.

Analyst Firms Making Recommendations

ARGUS RESEARCH BB & T CAPITAL
CO FORECST FIRST ANALYSIS
GABELLI & COMPA GOLDMAN SACHS
KEYBANC CAP MKT RAYMOND JAMES
STIFEL NICOLAUS WEDBUSH SECURIT

Conclusion

Waste Management reported strong third quarter 2013 results with a year-over-year increase in both earnings and revenues. The company is continuing with its restructuring initiatives, which are likely to reap benefits in the long run. Waste Management is also taking adequate measures to improve its yield in the coming year and at the same time remains focused on controlling its costs.

The company continues to return significant cash to its shareholders through dividends. However, high market price volatility, recycling operations headwinds, and huge integration costs related to acquisition could impair its long-term profitability to some extent. Nevertheless, expect the company to post strong quarterly numbers, and the stock to remain stable following the report.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the WM Jul 2014 45.000 call (WM140719C00045000) at or under $0.90 (Max. of $1.00), good for the day. Place a protective stop limit at $0.35 and a pre-determined sell at $1.80.



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