More Trash Equals More Cash for Waste Management, Inc.

By Markets Fool.com

Image source: Waste Management.

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Waste Management(NYSE: WM) announced strong third-quarter financial results on Oct. 26. The aptly named provider of garbage collection, landfill, and recycling services hauled in higher profits as it benefited from a powerful combination of price increases, strengthening volumes, and cost savings.

Revenues rose 5.6% to $3.55 billion, including growth of 1.6% from higher collection volume, 2.2% from average yield, and 1.9% from acquisitions, offset slightly by divestitures (-0.1%).

Additionally, Waste Management's pricing power was again on display in the third quarter, with core price improving 4.7% versus the prior-year period.

The garbage king also benefited from higher commodity prices, with average recycling prices rising 13.6% compared to Q3 2015.

Further helping to boost profits were Waste Management's cost-cutting initiatives, which helped the company reduce its selling, general, and administrative expenses to 9.3% of total revenue, down from 9.8% in the year-ago period. Still, operating expenses as a percent of revenue increased slightly to 62.5% from 62.4%, due mostly to higher disposal costs.

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All told, net income -- adjusted to exclude non-cash charges related to the impairment of a rural landfill and an increase to estimated environmental remediation reserves at a third-party closed site -- rose 11.6% to $374 million. And earnings per share, boosted by share buybacks, jumped 13.5% to $0.84.

Most importantly, Waste Management continues to excel at turning trash into cash for its investors. Third-quarter operating cash flow leapt 14.6% to $753 million, and free cash flow surged19.6% to$428 million. In turn, management passed on $182 million of this cash to shareholders in the form of dividends during the quarter.

In a press release, CEO David Steiner said:

Our focus on improving core price, growing high margin volumes, and containing costs continued our strong performance from the first half of 2016, as we again exceeded our revenue, earnings, and margin targets. Overall, the combined positive price, volume growth, and cost management drove increases in adjusted operating income, adjusted operating EBITDA, and margins when compared to the third quarter of 2015.

Looking forward

These robust results prompted Waste Management to boost its full-year revenue and profit outlook. The company now expects at least $2.91 in adjusted EPS, up from prior estimates of between $2.83 and $2.86. Management also reiterated its guidance for full-year free cash flow of $1.6 billion to $1.7 billion.

"In 2016, we have seen three consecutive quarters of strong price, positive volume, and better than expected earnings performance," added Steiner. "As a result, we are again raising our adjusted diluted earnings per share guidance for 2016."

That's likely music to Waste Management's investors' ears, since for much of the last half decade, the company has delivered tepid revenue and profit growth as volumes stagnated. Now, with volumes returning to positive growth while Waste Management continues to display a strong ability to raise prices above inflation, investors can expect higher earnings growth than has been the case in recent years.

With Waste Management's stock price up about 20% in the last year, it appears that the market has caught on to the trash titan's improved profitability. Yet even at today's prices, the stock remains worthy of consideration by investors, particularly those seeking a competitively advantaged business in a defensive industry.

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Joe Tenebruso has no position in any stocks mentioned. The Motley Fool owns shares of Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.