Can Waste Management (WM) Surprise Even on Q4 Earnings?

Waste Management, Inc. WM is scheduled to report fourth-quarter 2015 results before the opening bell on Feb 18. Waste Management has a solid earnings history, beating the earnings estimate thrice in the trailing four quarters for a positive average earnings surprise of 4.74%. Let's see how things are shaping up for this announcement.

Key Factors to Consider

Waste Management's successful cost reduction initiatives have helped it in accomplishing remarkable gross margin expansion and EBITDA growth. The company is undertaking several steps to further boost its margins — one of which is by charging for recycling glass. Glass packaging is the third-largest market in the recycled material packaging segment, and is expected to grow at a steady pace in the impending quarters. With its new strategy, Waste Management stands to gain on two fronts — from the growth in the addressable market and also from the additional revenues arising from recycling glass.

The company has a dominant market capitalization and a steady annual dividend policy. Waste Management plans to return significant cash to shareholders through healthy dividends and share repurchases in the future quarters as well. In addition, the company has taken prudent steps to divest non-core operations and focus on high-growth areas that will generate higher cash flows and boost the top line.

However, the company is expected to face commodity price headwinds, which will likely have a negative year-over-year impact on earnings. The recycling line of business is expected to witness a negative headwind in the range of 7 cents – 10 cents per share in 2015.

Furthermore, Waste Management expects volumes to be down due to lower national counts as it strives for improved margin growth and pricing. The pricing environment also remains challenging and highly competitive due to aggressive bidding by smaller competitors. This is likely to strain the bottom line of the company in the soon-to-be-reported quarter.

Earnings Whispers

Our proven model does not conclusively show that Waste Management is likely to beat earnings this quarter as it lacks the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently at 0.00%.

Zacks Rank: Waste Management's Zacks Rank #4 (Sell) when combined with 0.00% ESP makes an earnings beat prediction uncertain. The Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

American Capital, Ltd. ACAS, earnings ESP of +12.50% and a Zacks Rank #2.

ABM Industries Incorporated ABM, earnings ESP of +38.46% and a Zacks Rank #3.

Avianca Holdings S.A. AVH, earnings ESP of +45.24% and a Zacks Rank #3.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
ABM INDUSTRIES ABM: Free Stock Analysis Report
 
AMER CAP LTD ACAS: Free Stock Analysis Report
 
WASTE MGMT-NEW WM: Free Stock Analysis Report
 
AVIANCA HOLDNGS (AVH): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research