Goldman Sachs Double Upgrades Waste Management, Says Stock Is 'Least Expensive' Route To Sector Exposure

Waste stocks should be a core holding in ever investor's portfolio for four key reasons, according to Goldman Sachs.

The Analyst

Goldman Sachs' Brian Maguire upgraded Waste Management, Inc. WM from Sell to Buy with a price target lifted from $84 to $107.

Why Waste Stocks?

Waste stocks are more defensive in nature, especially during economic downturn cycles, Maguire said in an industrywide research report. (See his track record here.) 

Solid waste generation is predictable, and household waste tends not to fluctuate across economic conditions, the analyst said. Even if consumers use less during economic downturns, most waste collection companies charge a fixed monthly rate — so a decrease in waste would actually benefit companies in the form of savings on fuel and other costs, he said. 

Bears might be quick to point out that waste companies are exposed to two very cyclical businesses, Maguire said: selling recycled commodities such as paper and aluminium cans and U.S. residential construction.

EBITDA fell on average by 5.5 percent organically in 2009 due to a downturn in the recycling and housing markets. Yet the recycling and housing markets are already at "depressed" levels, which implies that cyclical downside risk for the group is more limited than many investors assume, the analyst said. 

On the other hand, the waste management group could potentially benefit from a rebound in recycling, and many companies are now introducing new fees for the collection and processing of recycled items, according to Goldman Sachs. 

Waste Management's stock trades at the lowest P/E multiple within the waste management group, which offers investors the "least expensive way" to gain exposure to the industry, Maguire said.

The company's volume growth from 2005 to 2015 lagged its peers, but since 2016 it has been an outperformer, and the stock deserves "credit for recent gains."

Price Action

Waste Management shares hit a new 52-week high Tuesday morning and were up 0.9 percent at $93.92 at the time of publication Tuesday. 

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Photo courtesy of Waste Management.