From 2007 through 2012, Waste Management did not grow its profits per share. It earned $2.07 per share in 2007, and $2.08 in 2012. What gives?
The answer is that the fees associated associated with disposing of trash in a landfill and having it collected from residential and commercial settings is generally stagnant during poor and ordinary economic conditions, and the hope is that fee increases during the boom years can offset the years of stagnation otherwise.
For the past half-century, that hasn’t been a smart bet. From 1962 through 2012, the average cost of trash collection in the United States rose at a rate of 1.7% annualized. Inflation over that time was 3.3%. When you study a trash collection company, therefore, you should correctly recognize the incredible strength of the recurring revenue stream that arises from the fact that everyone has to pay their trash bill, but you should also recognize that the growth of that revenue stream over time does not come from raising rates on residential and commercial customers so much as it comes from empire-building.
Right now, Waste Management’s profits are growing at 10% annualized, but that is not a figure that can be projected out indefinitely. There will be years where, absent cost-cutting or route growth, the profits will experience no growth. You have to incorporate those 2007-2012 periods when you value the stock.
Prior to 2015, there were only two years in the past thirty in which the P/E ratio of Waste Management exceeded 20x earnings. That is about right, as trash collecting is incredibly steady but offers limited earnings per share growth over a fifteen or twenty-year period–you’ll probably end up with 5-8% annual earnings per share growth.
Right now, Waste Management has a P/E ratio of 22x earnings, which is its third highest valuation point in the past four decades.
My expectation is that, five years from now, Waste Management will be around $5.35 per share (compared to $4.10 per share currently). I expect the P/E ratio will be around 18x earnings. That suggests a price of around $96 per share in 2023, barely above December 14, 2018’s close of $91.
I would be fine owning a business with rock-steady earnings and limited growth prospects, but the price would have to be a bargain. To me, that would mean Waste Management trading at a price below $60, or under 15x earnings. At that point, you would be buying the stock at a price point that could give you limited growth and market-beating returns.