As Waste Management Looks to Break Out, Don’t Toss Away a Trading Opportunity

The company released its second quarter financial results on the morning of Wednesday, July 27th. The stock ran 2.8% that day. The stock is up 9.1% since the closing bell the night prior. Some might see this ship as having sailed. Others might see potential for a breakout still in the making. I think I’m in that camp. Let’s discuss.

Let’s go back to July 27th first. Waste Management (WM) posted Q2 adjusted EPS of $1.44 (GAAP EPS: $1.41) on revenue of $5.027B. The firm beat Wall Street on both the top and bottom lines. The revenue number was good for year over year growth of 12.3%, while net income either increased 67.2% (GAAP) or 11.3% (adjusted).

For the quarter, core price (a performance metric used by management to measure the effectiveness of pricing strategies) was 7.5%, up from 6.2% for the year ago comp while collection and disposal yield jumped to 6.2% for Q2 2022 from 3.7% a year ago. Total company volumes increased 1.6% on top of a very strong Q2 2021 comp that saw those volumes increase 9.2% from the year prior driven by the nation’s recovery from the lows of the pandemic.

Outlook

Waste Management now sees full year 2022 revenue growth of approximately 10%. That’s up 400 basis points from the midpoint of previous guidance and crushed the 8.1% or so that Wall Street was looking for. Adjusted EBITDA is now seen for the full year between $5.5B and $5.6B, which is an increase of $175M from previous guidance.

Projected EBITDA margin is projected at 28.1% including an estimated 60 basis point negative impact related to fuel costs. Free cash flow is being guided above the upper bound ($2.7B) of the firm’s previous outlook, excluding targeted sustainability growth investments. Those investments are expected to run between $2.05B and $2.15B.

Balance Sheet

As of June 30th, WM ran with a net cash position of $894M, and current assets of $3.987B. This included receivables of $2.665B. Current liabilities amounted to $3.722B, including $3.491B in payables. That leaves the firm with a current ratio of 1.07. That’s good enough to be able to meet obligations, but there really is little room for error as this is a receivables vs. payables match-up.

Total assets come to $30.128B, including $9.856B in “goodwill” and other intangibles. That’s 32.7% of total assets, which is a bit much for me. Total liabilities less equity adds up to $22.936B including long-term debt of $14.046B. Needless to say, I do not love this balance sheet. My opinion is that the cash position is just too small relative to debt. I would love to see the debt-load worked on by management.

My Thoughts

I think I have to love the increased guidance. The stock trades at 29 times forward looking earnings, which is a bit on the expensive side. That said, the business appears to be in a very good place. I certainly do not like the sloppy balance sheet.

In the press release, the firm mentions that they expect to repurchase an additional $980M worth of common stock in 2022, which would fulfill the current authorization. Maybe this expense might be put to better use paying down some debt. Just an idea. This kind of rules out a longer-term investment. Not a trade though. Hear me out.

Readers will see that WM has formed a year to date double bottom formation with a $170 pivot. The stock retook all of its key moving averages in early July and now approaches that pivot with a very strong looking daily MACD, and a reading for Relative Strength that has started to look overbought.

The stock is at an inflection point. Should WM take and hold pivot, my target price would be up above $200. Failure at this spot and a retest of the 200 day SMA (currently $155) is not out of the question.

Trade Idea (minimal lots)

– Purchase one WM August 19th $170 call for a rough $2.25

– Sell (write) two WM August 19th $160 puts for about $0.80

Net Debit: $0.65

Best Case: The stock catapults higher off of pivot and the trader gets long 100 shares in two weeks at a net basis of $170.65.

Worst Case: The stock is rejected at pivot, and the trader ends up long 200 shares in two weeks at a net basis of $160.33 with the shares trading below $160.