Numbers can lie — yet they’re the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock’s true value based on the following clues:
- The current price multiples.
- The consistency of past earnings and cash flow.
- How much growth we can expect.
Let’s see what those numbers can tell us about how expensive or cheap Waste Management (NYSE: WM ) might be.
The current price multiples
First, we’ll look at most investors’ favorite metric: the P/E ratio. It divides the company’s share price by its earnings per share (EPS) — the lower, the better.
Then we’ll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow, which divides the company’s enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). As with the P/E, the lower this number is, the better.
Analysts argue about which is more important — earnings or cash flow. Who cares? A good buy ideally has low multiples on both.
Waste Management has a P/E ratio of 14.6 and an EV/FCF ratio of 17.4 over the trailing 12 months. If we stretch and compare current valuations with the five-year averages for earnings and free cash flow, we see that Waste Management has a P/E ratio of 13.9 and a five-year EV/FCF ratio of 16.2.
A positive one-year ratio of less than 10 for both metrics is ideal (at least in my opinion). For a five-year metric, less than 20 is ideal.
Waste Management has a mixed performance in hitting the ideal targets, but let’s see how it stacks up against some of its competitors and industry mates.
|Republic Services (NYSE: RSG )||18.2||15.0||27.1||24.3|
|Stericycle (Nasdaq: SRCL )||30.1||25.5||39.0||35.5|
|Casella Waste Systems (Nasdaq: CWST )||4.2||43.8||NM||25.0|
Source: S&P Capital IQ; NM = not meaningful because of losses.
Numerically, we’ve seen how Waste Management’s valuation rates on both an absolute and relative basis. Next, let’s examine …
The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash-flow generation.
In the past five years, Waste Management’s net income margin has ranged from 7.4% to 8.6%. In that same time frame, unlevered free cash flow margin has ranged from 10.5% to 12.7%.
How do those figures compare with those of the company’s peers? See for yourself:
Source: S&P Capital IQ; margin ranges are combined.