Waste Management Not Trash, Is Worth $60, Says Stifel

• Waste Management, Inc. WM shares have been volatile in 2015 and have risen 11 percent in the last three months.
• Stifel’s Michael E. Hoffman upgraded the rating on the company from Hold to Buy, while establishing a price target of $60.
• Cost cut initiatives and sustained volume improvement are expected to boost the company’s cash flows, Hoffman stated.

Waste Management is taking steps to curb capital spending, cut costs and boost productivity. The company’s continued focus on reducing its long-term working capital requirements, combined with a sustained volume improvement, is expected to boost its baseline free cash flows, analyst Michael Hoffman mentioned.

Waste Management is poised for significant gross margin expansion, driven by overall market volume growth and cost cuts, Hoffman said. The company is expected to report 3Q15 sales of $3.356 billion, EBITDA of $902.8 million and EPS of $0.69.

Hoffman pointed out that since nearly 10 percent of Waste Management’s sales are tied to the sale of recycled commodities, the company is highly sensitive to price swings in the blended commodity basket, especially paper and OCC. Paper prices improved sequentially in 3Q15, although prices of plastics and metals deteriorated.

“All-in-all the positive move in paper should be enough to narrow the YoY change in the blended commodity value versus the 1H15. If the commodity basket price holds into 4Q15 the YoY change is less than 5%,” the Stifel report noted.

Hoffman added that recycling in 2016 could support EBITDA margin expansion, despite a CPI headwind.