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Waste Management Company Analysis 1
Waste Management Incorporated
Company Analysis
Group 10: Amanda Bowling, Aesha Desai,
Curtis Anderson, Jaimin Chokshi,
Michael Stewart, Bhavik Shah
University of North Alabama
Management Policy
Waste Management Company Analysis 2
Table of Contents
Executive Summary 14
Introduction 15
Company Background 15
Customers & Services 18
Corporate Portfolio 19
Segment Growth Rates 21
Production Sales Data 22
Regional Net Sales 23
Revenue 24
Net Income 25
Expenses 26
Stock Prices 27
Market Share 28
Current Strategies 28
Corporate 28
Business 30
Functional 31
Core Competencies 32
Solid Waste Disposal 32
Transfer Stations 33
Landfills 34
Recycling 34
Waste-to-Energy 35
Waste Management Company Analysis 3
Gas-to-Energy 35
Competitive Environment 36
Competitive Profile 36
Revenue 37
Net Income 38
Sales Growth 40
Revenue Per Employee 41
Average Operating Income 42
Net Profit Margin 43
Return on Investment 44
Net Income Per Employee 45
Conclusion of Competitive Analysis 46
Significant Competitors 47
Allied Waste Industries 48
Republic Services 48
Competition Core Competencies 51
Allied Waste 51
Collection 51
Transfer Stations 51
Recycling 51
Landfills 52
Gas-to-Energy 52
Republic Services 52
Waste Management Company Analysis 4
Collection 52
Transfer Stations 53
Landfills 53
Recycling 53
Summary of Core Competencies 53
Key Factors of Competition 55
Geographic Location 55
Pricing 55
Quality of Operations 56
Increases in Recycling 56
Cost Effectiveness 56
Governmental Permits 57
Competitive Summary 57
Purpose of this analysis 58
Corporate Profiles 59
Waste Management Inc. 60
Allied Waste Industries, Inc. 62
Republic Services, Inc. 63
Growth Analysis 64
Revenue 65
Net Income 66
Market Value Analysis 69
Earnings per Share (EPS) 69
Waste Management Company Analysis 5
Price to Earnings (P/E) 69
Price to Sales (P/S) 70
Price to Book (P/B) 70
Price to Cash Flow (P/CF) 70
Stock Price 72
Profitability Ratios 73
Gross Profit Margin 73
Operating Profit Margin 74
Net Profit Margin 75
Return on Assets 76
Return on Equity 77
Return on Assets Trend Analysis 78
Recommendations for Improvement 79
Liquidity Ratios 82
Current Ratio 83
Quick Ratio 84
Recommendations for Improvement 85
Leverage Ratios 86
Debt to Assets and Debt to Equity 86
Interest Coverage (Times Interest Earned) 87
Short-Term Debt 88
Recommendations for Improvement 89
Turnover Ratios (Asset Management) 90
Waste Management Company Analysis 6
Receivables Turnover 90
Fixed Assets Turnover 92
Total Assets Turnover 92
Recommendations for Improvement 93
Solvency Ratios 94
Solvency Ratio 95
Operating Cash Flow 96
Recommendations for Improvement 97
Financial Analysis Summary 98
Revenue and Sales 102
Company Growth 103
Profit Margins 105
Return on Assets & Velocity 107
Cash Assets 108
Cash Flow 108
Competitive Analysis 111
SWOT Analysis 112
Strengths 112
Technology 112
Strategies 112
Global Position 113
Market Share 113
Marketing 113
Waste Management Company Analysis 7
Products/Services 113
Licenses/Permits 114
Assets 114
Landfills 114
Transfer Stations 114
Trucking Fleet 114
Weaknesses 115
Leadership 115
Financial Measures & Returns 115
Size 117
Dealing with Strengths and Weaknesses 117
Opportunities 120
Renewable Energy Sources 120
Recycling Programs & Gas-to-Energy 121
Threats 121
Political & Governmental 121
Legal Forces 122
Economic Conditions & Complementors 122
Competition 123
Management of Opportunities and Threats 124
Business Definition 128
Evolution of the Industry 128
The Future of Waste Management: New 129
Waste Management Company Analysis 8
Products/Services
Future Customers 130
Major Competitors 130
Allied Waste Industries 131
Republic Services 131
Possible Mergers & Acquisitions 132
Objectives 133
Revenue/Sales 133
Justification 133
Net Income 134
Justification 134
Market Share 135
Justification 135
Alternatives 136
Building Materials 138
Solar Panels 139
Windmill Energy Generation 140
Alternative Pros & Cons 141
Building Materials 141
Solar Panels 142
Windmill Energy Generation 142
Recommendations 143
Implementation Considerations 145
Setting Unreasonable Expectations 145
Waste Management Company Analysis 9
Elastic Business Definition 146
A Cause, Not a Business 146
New Voices 147
Open Market for Capital & Talent 147
Low Risk Experimentation 148
Cellular Division 148
References 150
Tables
Table 1 Gross Segment Revenue 21
Table 2 Net Sales by Product 23
Table 3 Regional Net Sales 24
Table 4 Revenues 25
Table 5 Net Income 25
Table 6 Stock Prices 27
Table 7 Competitive Profile 36
Table 8 Revenue 37
Table 9 Net Income 38
Table 10 Sales Growth Rate 40
Table 11 Revenue Per Employee 41
Table 12 Average Operating Margin 42
Table 13 Net Profit Margin 43
Table 14 Return on Investment 44
Waste Management Company Analysis 10
Table 15 Net Income Per Employee 45
Table 16 Competitor Comparison 49
Table 17 Operating Revenue; WMI 62
Table 18 Revenue Sources; WMI, AW, RSG 64
Table 19 Revenue – Four-Year; WMI, AW, RSG 66
Table 20 Net Income; WMI, AW, RSG 68
Table 21 Company Ranking – Revenue 68
Table 22 Market Value Analysis 71
Table 23 Company Ranking – Market Value
Analysis
72
Table 24 Stock Prices – Highs and Lows 73
Table 25 Gross Profit Margin; WMI, AW, RSG 74
Table 26 Operating Profit Margin; WMI, AW, RSG 75
Table 27 Net Profit Margin; WMI, AW, RSG 76
Table 28 Return on Assets; WMI, AW, RSG 77
Table 29 Return on Equity; WMI, AW, RSG 78
Table 30 Company Ranking – Profitability 80
Table 31 Current Ratio; WMI, AW, RSG 84
Table 32 Quick Ratio; WMI, AW, RSG 85
Table 33 Company Ranking – Liquidity Ratios 85
Table 34 Debt Ratio; WMI, AW, RSG 87
Table 35 Debt to Equity; WMI, AW, RSG 87
Table 36 Times Interest Earned; WMI, AW, RSG 88
Waste Management Company Analysis 11
Table 37 Short-Term Debt; WMI, AW, RSG 89
Table 38 Company Ranking – Leverage Ratios 89
Table 39 Receivables Turnover Ratio; WMI, AW, RSG 91
Table 40 Fixed Assets Turnover Ratio; WMI, AW, RSG 92
Table 41 Total Assets Turnover Ratio; WMI, AW, RSG 93
Table 42 Company Ranking – Turnover Ratios 94
Table 43 Solvency Ratio; WMI, AW, RSG 95
Table 44 Operating Cash Flow Ratio; WMI, AW, RSG 96
Table 45 Company Ranking – Solvency Ratios 97
Table 46 Net Profit Margin 105
Table 47 Net Operating Cash Flow 110
Table 48 Net Financing Cash Flow 110
Table 49 Net Investing Cash Flow 111
Table 50 Return on Assets 116
Table 51 Return on Equity 116
Table 52 Company Ranked Profitability Ratios 116
Table 53 Strategy/SWOT Matrix Worksheet 125
Table 54 Projected Revenue/Sales 134
Table 55 Projected Net Income 135
Figures
Figure 1 Company Time Line 18
Waste Management Company Analysis 12
Figure 2 Segment Revenue by Percentage 21
Figure 3 Income from Operations 22
Figure 4 Revenue Sources 24
Figure 5 Operating Expenses 26
Figure 6 Five Year Total Return 28
Figure 7 Revenue 38
Figure 8 Net Income 39
Figure 9 Sales Growth Rate 40
Figure 10 Revenue Per Employee 41
Figure 11 Average Operating Margin 42
Figure 12 Net Profit Margin 43
Figure 13 Return on Investment 45
Figure 14 Net Income Per Employee 46
Figure 15 Industry Market Share, 60
Figure 16 Revenue Sources; WMI, 61
Figure 17 Revenue Sources; AW, 63
Figure 18 Revenue Sources; RSG, 64
Figure 19 Waste Management Revenue 2004-2007, 66
Figure 20 Waste Management Net Income 2004-2007, 67
Figure 21 Trend Analysis: Waste Management vs.
Five year Industry Average
79
Figure 22 Net Profit Comparison 107
Figure 23 Industry Market Share 131
Waste Management Company Analysis 13
Executive Summary
Waste Management Company Analysis 14
This paper will discuss the history of Waste Management
Incorporated. The current strategies, core competencies, industry
segments, and major competitors of the company will also be
discussed. In the competition section, this paper presents a
competitive profile table, outlining key competitive measurements
of their major competitors, Allied Waste and Republic Services.
In that section, we also discuss current aspects of the
competitive environment that are likely to affect Waste
Management, namely recent merger talks between Allied and
Republic.
The next section is the financial section. The financial
analysis section provides key ratios, such as profitability,
liquidity, turnover, leverage, and solvency ratios for Waste
Management and their top two competitors over the past four
years. A growth and market value analysis is presented, with
information on the corporate profile of each firm. A cash flow
discussion is also included for Waste Management.
The next section examines and identifies the key strengths,
weaknesses, opportunities, and threats of Waste Management. The
strengths and weaknesses are discussed, along with how Waste
Management can leverage their strengths, and overcome their
weaknesses. The paper also discusses the opportunities and
threats, of the external environment, and how Waste Management
Waste Management Company Analysis 15
can take advantage of the opportunities and minimize the impact
of threats.
Forward-looking data is also included in this analysis. The
paper discusses where we think the industry will be in ten years
based on current trends, future customers, competitors, and
future product offerings of Waste Management. The objectives that
we feel are important to the future of the company are also
discussed, along with viable alternatives for the future industry
state. These alternatives are discussed, along with our
recommendation and implementation issues.
Introduction
Company Background
The company, Waste Management Ltd., was founded by Dean L.
Buntrock and his cousin Wayne Huizenga in 1971 (Hoover’s, 2008).
Buntrock and CEO Phillip Rooney, depended mainly upon
acquisitions to create a massive waste-disposal empire (Waste
Management History, 2008). They acquired and consolidated many
local haulers, including firms in Canada during the 1970’s
(Hoover’s, 2008). As the company grew, they began to divide into
specialty areas by forming Chemical Waste in 1975; ENRAC in 1980,
which conducted site clean-ups; and servicing nuclear waste
clients with Chem-Nuclear systems in 1982 (Hoover’s 2008). In
1988 Waste Management entered into a merger agreement with
Wheelabrator, allowing WMI a 22% ownership interest. In 1990,
Waste Management Company Analysis 16
Wheelabrator Technologies became a subsidiary of Waste Management
Incorporated (Wheelabrator, 2004).
The company grew at a phenomenal pace and in 1993 the
company began to diversify. They also were renamed WMX during
1993. However, in 1997 they changed their name back to Waste
Management (Hoover’s, 2008). That same year Dean Buntrock, and
CEO Phillip Rooney left the company (Waste Management, 2008).
After going through four different CEO’s over a period of eight
months, the company brought in turnaround specialist, Steve
Miller, to take on the role of CEO (Hoover’s, 2008).
In 1998, the company merged with the Houston based company,
USA Waste Services, in a deal that was worth around $25 billion
(Waste Management, 2008). The management team of USA Waste took
control over the business, with John Drury as CEO. In 1999, the
company acquired Eastern Environmental Services for $1.3 billion,
and shortly after this acquisition, John Drury took leave due to
medical reasons. It was during this time that shareholders filed
an insider trading lawsuit against the firm. The acting CEO,
Rodney Proto, was fired due to allegations of insider trading and
was replaced with Maury Myers (Hoover’s, 2008).
In 2000, Waste Management moved into a restructuring phase,
selling off their operations in Europe, Asia, and South America.
They hoped to concentrate on their core business. Along the same
lines, in 2002, they began reorganizing operations by reducing
Waste Management Company Analysis 17
their workforce by 57,000 employees. During this same time the
SEC filed a lawsuit against six former Waste Management
executives for fraud (Hoover’s, 2008).
In 2003 the firm formed new recycling units and acquired
Pelts group, the largest privately held recycling firm. They also
went on to acquire 75 complementary collection business and
divested operations (Hoover’s, 2008). Currently the Houston based
company owns, 354 collection operations, 341 transfer stations,
277 active landfill disposal sites, 16 waste-to-energy plants,
105 recycling plants and 108 beneficial-use landfill gas
projects. Such a diversified support structure, allows Waste
Management to serve the various needs of over 21 million
customers (Waste Management History, 2008). In Figure 1 you will
see the timeline for the company.
Waste Management Company Analysis 18
Time Line of Waste Management Incorporated
Figure 1
Customers and Services
Waste Management services over 20 million municipal,
commercial, industrial, and residential customers. For their
bigger customers, they also utilize their “Upstream Group” to
provide a full range of services and waste strategies. They
provide waste and energy resource services to their customers
through their 354 disposal operations, 341 transfer stations, 277
active landfills, 16 waste-to-energy sites, 105 recycling
facilities, and 108 landfill gas sites. They operate in Puerto
Rico, Canada, and in every state in the United States except,
two. The firm continues to pursue the standardization of best
practices and individual customer pricing initiatives, to provide
1971 WMI Est..
During the 1970’s made acquisitions
1975 Chemical Waste
1980 ENRAC
1982 Chem Nuclear
1993 Change name to WMX
1997 Change Name Back to Waste Management
1998 Merger with USA Waste
1999 Acquired Eastern Recycling
2000 Sold Asian, South American, & European Operations
2002 Began Re-organization
2002 Insider trading allegations
1990 Acquired Wheelabrator
Acquired Pelts Group
Waste Management Company Analysis 19
customers with better service. Waste Management has also updated
and consolidated service call centers in an effort to provide
representatives will real-time solutions for customers. They
handle around 20 million phone calls a year for the company.
Waste Management continues to strive to be first in the minds of
customers (Waste Management Annual Reports, 2007).
Corporate Portfolio
Waste Management owns a portfolio of business functions
including collection, transfer, disposal, recycling, waste-to-
energy, and gas-to-energy segments. In the United States and
Internationally, Waste management Inc. supplies incorporated
services. The company also offers extra waste management
services, such as on-site service, methane gas recovery, and
third-party subcontracted and administrative services. It
services commercial, industrial, municipal, and residential
customers, as well as other waste management companies, electric
utilities, and governmental bodies. It is at present, the biggest
waste disposal company in North America (www.finance.yahoo.com/q?
s=WMI).
They divide their business into the following operating
segments: Eastern, Midwest, Southern, Western, Wheelabrator, WMRA
and other. During the 2007 operating year, these operating groups
provided gross revenue totaling $15.6 billion. Table 1 compares
the individual segment revenue for the years 2005 through 2006
Waste Management Company Analysis 20
and was pulled from the financial statements of Waste Management.
As of 2005 the Canadian operation’s revenues were allocated
between the Midwest and Eastern Groups. Revenue from the
operations in Puerto Rico operations is included in the other
category (Waste Management Annual Report, 2007).
During the 2007 operating year, substantial growth was
achieved through pricing initiatives. During 2007, Waste
Management saw increases in revenue in the Eastern and Western
segments, through transfer station savings. The Southern and
Eastern segments had growth provided by municipal solid waste
revenue. The Western segment had growth from special waste
revenue. However, all of these revenues were offset by lower
waste volumes. In Figure 2 the revenue percentages are broken
down into the operating segments (Waste Management Annual Report,
2007).
Waste Management Company Analysis 21
Table1
Gross Segment Revenue (millions)
2007 2006 2005
Eastern 3281 3614 3632
Midwest 2983 3003 2922
Southern 3681 3759 3590
Western 3508 3511 3416
Wheelabrator 868 902 879
WMRA & Other 1260 1023 1101
Segment Revenue Percentages
Figure 2
Segment Growth Rates
Looking at gross revenue, the segment that is growing is the
recycling segment. It had a 23% revenue increase from 2006 to
2007. The rest of the segments are actually declining. This is
Waste Management Company Analysis 22
due to the economic downturn affecting the volume of waste. Most
of the increases in the other segments are related to price
increases, but were offset with the volume declines. Figure 3 was
taken from the financial statement presentation of Waste
Management Incorporated, and shows the income from operations
growth over the past three years. Over the 2006 and 2007 year the
company experienced 11% growth in operating income. Over the 2005
to 2006 year the company had 19% growth (Waste Management
Investor Presentation, 2007).
Income from Operations Growth (In Millions)
Figure 3
Product Sales Data
In Table 2 the net sales by product are presented for Waste
Management Incorporated. Their biggest revenue comes from their
collection services division. Collection of waste makes up 55% of
Waste Management Company Analysis 23
the entire net sales, and its’ value is $3300 million. Landfill
service revenue makes up 20% of the entire net sales, bringing in
revenue of $1200 million. Transfer of waste makes up $660
million, recycling $480 million, and waste-to-energy $360 million
(www.finance.yahoo.com/q?s=WMI).
Table 2
Net Sales by Products
Collection $3300
Landfill $1200
Transfer $660
Recycling $480
Waste-to-energy $360
Note: Currency is in Millions
Regional Net Sales
Regional net sales are shown in Table 3 for Waste
Management. During the 2007 operating year the Southern and
Western divisions brought in the most net sales revenue. This was
in large part due to special waste service charges in the Western
division and the amount of waste collections in the Southern
division. This trend can also be seen during the 2006 and 2005
operating years, as well (Waste Management Annual Report, 2007).
Table 3
Waste Management Company Analysis 24
Regional Net Sales (millions)
2007 2006 2005
Eastern 2650 2875 2848
Midwest 2491 2487 2414
Southern 3141 3191 3034
Western 3064 3046 2969
Wheelabrator 797 831 817
WMRA & Other 1167 933 992
Revenue
Figure 4 Retrieved from: Waste Management, Inc. (WMI)
Table 4
Waste Management Company Analysis 25
Revenue
2003 2004 2005 2006 2007WMI 11,648.0 12,516.0 13,074.0 13,363.0 13,310.0www.wastemanagement.com
In Table 4 the revenue for Waste Management is shown for the
last five years in millions. As of December 2007, revenues at WMI
were 13.31B; down .37% from 2006 (13.36B). Revenue has steadily
been climbing for the company until 2007. This was in large part
due to volume declines, and will be discussed in further detail
in the financial section. A visual representation the breakdown
of revenues by services is presented in Figure 4. Collection
makes up the largest portion of the company’s revenue sources,
followed by landfills, transfer stations, recycling, and last
waste-to-energy operations.
Net Income
Table 5
Net Income
2003 2004 2005 2006 2007WMI 630.0 939.0 1,182.0 1,149.0 1,163.0www.wastemanagement.com
Table 5 shows the net income for Waste Management for the
past five years in millions. Net income rose at WMI Company
during 2007 by $14 million. This is in large part due to cost
Waste Management Company Analysis 26
savings initiatives the company has instigated. This will also be
discussed in the financial section in more detail.
Expenses
Operating Costs as a Percent of Revenue
Figure 5
Figure 5, which was obtained from the investor presentation
of Waste Management, shows the operating costs over the past
three years as a percent of revenue. The chart depicts the
increased cost savings initiatives Waste Management has put into
place to lower operating costs. These include an updated mapping
system for truck routes, improvements in safety programs, and a
reduction in administrative staff (Waste Management Annual
Reports, 2007).
Waste Management Company Analysis 27
Stock Prices
Table 6
Stock Prices
2003 2004 2005 2006 2007
WMI 29.600 29.940 30.350 36.770 32.670
www.wastemanagement.com
In the Table 6, we can see that the stock prices have
steadily increased until 2007. This is largely due to the
economic downturn, divestures, and the potential losses
associated with decreased waste volumes. The ratios that affect
stock price will be discussed in more detail in the financial
section (Waste Management, 2007).
In Figure 6 the comparison of cumulative five year returns
is depicted. From this graph you can see that Waste Management
has returns in line with both the Dow Jones industry averages and
the S&P 500 index. This data was pulled from the financial
statements of Waste Management (Waste Management Annual Report,
2007).
Waste Management Company Analysis 28
Figure 6
Market Share
As for market share, Waste Management Inc. holds the biggest
share with a 28.5% share, Allied Waste controls around 13% of the
market, and Republic Services has 6.6% of the market share
(Scharf, 2008). Past the point of these three competitors, there
is a highly fragmented market with many competitors (Hoover’s,
2008). Each firm has similar strategies, but different financial
data based on their share of the market, price structure, and
cost savings initiatives.
Current Strategies
Corporate Strategy
In this part, an analysis of the present national and
international business stratagems followed at WMI will be
Waste Management Company Analysis 29
studied. Waste Management’s corporate strategy is to grow revenue
through pricing; and continue efforts to lower operating,
selling, general, and administrative costs through process
standardization and productivity improvements. They want to
continue to improve their business units through their “fix or
seek exit” strategy and generate strong and consistent cash flows
from operations for shareholders. Waste Management is also
continuing to divest underperforming operations (Waste Management
Annual Report, 2007).
The company continues to grow their business units and look
for synergistic acquisitions. They are concentrating particularly
in the areas of energy generation and recycling. Their strategy
is to service the waste needs of customers, by providing
environmentally friendly and sustainable solutions to satisfy
current and future customers. Waste Management is dedicated to
producing the highest level of client support and services. They
also want to achieve high returns for shareholders (Waste
Management Annual Report, 2007).
Waste Management is also devoted to the continual
improvement of safeguards for the environment. These efforts
distinguish Waste Management as an ecologically friendly company
that will be able to continue to meet increased environmental
regulations.
Waste Management Company Analysis 30
Business Strategy
Waste Management adapts its business to serve the unique
requirements of each of its consumer clusters. The firm has
decreased their focus on combinations and attainments, and in
there place, the firm relies on increasing their resources and
growing services. Through WMI’s fiscal resources, the company is
able to construct and attain valuable assets that allow them to
attain fiscal objectives. They work together with the different
administrations, educational associations, and support
departments, of the geographic regions they conduct business
within, to obtain access to the most cost efficient techniques of
waste management that are accessible. One of their chief
strategies is to increase investor prosperity by belonging to
organizations in every geographic region that the company
conducts business within. It is their goal to maintain facilities
and community faith in their continued presence within the
geographic regions they compete in.
They compete among other competitors in the waste industry
on price, services, and availability. They are currently
implementing cost saving programs to reduce the amount of
operating cost passed on to customers. They continue to look for
ways to improve operating efficiency and customer service. They
recently centralized call centers to provide better information
Waste Management Company Analysis 31
and service to customers. They also service more geographical
regions than their competitors. Waste Management seeks to be the
first in the minds of customers on waste services (Waste
Management, 2007).
Functional Strategy
The company’s functional strategy is to shift to extra
profitable procedures, like expanding their environmental
operations and cost savings initiatives. One of their initiatives
is to focus on improving the fuel efficiency of their operating
fleet. They are planning on expanding their research and
development of alternative fuel sources, for vehicles. They are
expecting to invest around $500 million toward increasing the
fuel efficiency of their fleet over the next ten years. They also
plan to continue their environmentally friendly marketing
campaign, under the “Think Green” slogan (Waste Management,
2007).
In the human resource area, Waste Management seeks to
improve the safety record of the company. This will aid them in
financial strategies to reduce costs and improve operating
income. This strategy also promotes employee welfare. The company
is seeking to imbed safety into the everyday operations. It is a
way of life that is imbedded in the way they work, the judgments
they formulate, and the measures they acquire. WMI aims to
accomplish outstanding protection and be the safest company in
Waste Management Company Analysis 32
the industry. The strategy is known as Mission to Zero (M2Z). The
company plans to support this plan to reduce the amount of
hazardous decisions, dangerous conditions, perilous tools, and
unsafe approaches that employees might take. The foundation of
M2Z is well documented, and each employee goes through the safety
training process. This program actively enhances employee
happiness and superior consumer contentment (Waste Management,
2008).
Core Competencies
Waste Management specializes in handling, collecting,
treating, transferring, and disposing of solid and hazardous
waste. The firm also holds core competencies in the industry
segments of recycling, waste-to-energy, and gas-to-energy
generation. All of these core business processes derive off of
the company’s ability to provide effective customer services.
Solid Waste Disposal
Waste Management provides solid waste pickup and disposal.
This waste includes, food items, furniture, newspapers, and so
on. In 2003, the US produced more than 236 million tons of solid
waste. This equates to around 4.5 pounds of waste per person, per
day (Municipal Solid Waste, 2008). Waste Management collects
waste for nearly 20 million residential, commercial, and
industrial customers. They have an extensive area they can
service, since they are in all states except two in the United
Waste Management Company Analysis 33
States. They also have the largest fleet of trucks to serve
customers needs (Waste Management Annual Report, 2007).
They provide curbside service, and contract terms of three
years for industrial or commercial accounts. For residential
services they contract with municipalities for one to five years,
to provide services. They process the waste down two paths. They
either haul it directly to the landfill, or collect it and take
it to a transfer station to be compacted. Once the waste has been
compacted it is hauled to the closest landfill, via Waste
Management’s trucks or their railcar system (Waste Management,
2007).
Waste management also treats hazardous waste. This kind of
waste includes hazardous waste items such as, medical and nuclear
waste. Waste in this segment is largely generated by industrial
manufacturers (Hazardous Waste, 2008). They operate several
hazardous waste landfill sites, and meet necessary EPA
regulations to operate them (Waste Management Annual Report,
2007).
Transfer Stations
WMI owns and operates 341 transfer stations that serve as
efficient way stations between collection points and landfill
disposal. At these stations waste is consolidated and compacted
for eventual transport to landfills. They own more transfer
stations than their major competitors. This enables them to be
Waste Management Company Analysis 34
more efficient in the transportation and disposal of waste (Waste
Management, 2007).
Landfills
WMI owns and operates the largest network of landfills in
the industry. As of December 31, 2007, WMI owned or operated 271
solid waste and six hazardous waste landfills. In addition, it
managed 187 closed landfills. WMI utilizes Next Generation
Technology that accelerates the decomposition of waste in
landfills so that decomposition time is reduced from decades to
years (Waste Management, 2007).
Recycling
Recycling has enabled Waste Management to process newly
manufactured products, and in addition it saves valuable landfill
space. Waste is sorted out that can be recycled and new products
are manufactured from this waste (Municipal Solid Waste, 2008).
WMI processes more recyclables than any other company in North
America. Through its subsidiary, WM Recycle America, WMI partners
with the local community to process more than 5.5 million tons of
recyclable materials each year through its 109 material recovery
facilities. For commercial accounts, WMI offers easy and cost-
effective recycling through its single-stream recycling,
eCycling, or shredding, to regional and national bale routes
(Waste Management, 2007).
Waste Management Company Analysis 35
Waste-to-energy
Waste Management, through their subsidiary Wheelabrator, is
able to process garbage into energy resources. This is one of
Waste Management’s strongest core competencies. In fact none of
their immediate competitors, mentioned in this paper, have that
capability. Wheelabrator’s waste-to-energy plants have the
capabilities of producing 609 megawatts of power, enough to power
over 900,000 homes (Wheelabrator, 2004). The added benefits of
converting waste-to-energy, is that it reduces the waste going to
landfills by 90%. The process has also been approved by the
Environmental Protection Agency as having one of the lowest
environmental impacts in the generation of electricity (Waste
Management Annual Report, 2007).
Gas-to-Energy
As of December 31, 2007, WMI was producing commercial
quantities of methane gas at 108 of it solid waste landfills,
where it is either sold to electricity utilities or to natural
gas suppliers. Waste Management leads the industry in the
building and operations of methane gas plants. During the 2007
year alone, they built seven new operations. These operations
supply enough energy to power around 400,000 homes and enable the
company to gain renewable energy credits for greenhouse gas
emissions (Waste Management, 2007).
Waste Management Company Analysis 36
All of these competencies give Waste Management the potential
to dominate the waste industry. However, they are not without
competitors. The next section will discuss the competitive
environment Waste Management faces, the top two competitors, and
discuss the core competencies of the top two competitors against
Waste Management.
Competitive Environment
Competitive Profile
The competitive environment in the waste industry is highly
fragmented past the top three competitors (Hoovers, 2008). In
Table 7 the comparative competitive profile of companies in the
waste industry are presented. These areas will be discussed in
the sections below.
Table 7 Competitive profile of the companies under the waste management Industries 2007
WMI ALLIED REPUBLIC SERVICES
WASTE CONNECTION
STERICYCLE
Revenues(Millions)
$13,310 $6,068.7 $3,176.2 $958.5 $932.8
Net Income(Millions)
$1,630 $ 273.6 $290.2 $99.1 $118.4
Sales Growth Rate(2003-2007)
3.49% 3.17% 6.07% 14.69% 18.36%
Revenue Per Employee
$282,477 $267,908 $245,369 $198,773 $160,345
Average Operating Margin (2003-
14.45% 16.40% 16.72% 22.98% 25.75%
Waste Management Company Analysis 37
2007)Average Net Profit Margin (2003-2007)
8.05% 2.89% 8.91% 10.90% 13.17%
Return On Investment (2003-2007)
6.00% 1.36% 6.57% 5.59% 9.53%
Net Income Per Employee
$24,599 $15,311 $24,031 $20,044 $19,812
Data for Table obtained from: http://www.reuters.com/finance/stocks/ratios?symbol=RSG.Nhttp://www.reuters.com/finance/stocks/ratios?symbol=AW.Nhttp://www.reuters.com/finance/stocks/ratios?symbol=WMI.N
Revenue
Table 8
Revenue
WMI ALLIED REPUBLIC SERVICES
WASTE CONNECTIO
N
STERICYCLE
Revenues(Millions)
$13,310
$6,068.7
$3,176.2
$958.5 $932.8
Waste Management Company Analysis 38
Figure 7
In Figure 7, the graph shows the revenue in millions for
five firms in the waste industry. Waste Management’s revenue is
higher than all other competitors depicted, combined. The other
four together have earned around $11,000 million, whereas WMI
alone has earned $13,310 Million. The area that seems to be
growing the most rapidly is the recycling segment of the
industry. This segment will play an important role in the
continued success of revenue growth for Waste Management. Last
year alone, they recycled 8 Million tons.
Net Income
Table 9
Net Income
WMI ALLIED REPUBLIC SERVICES
WASTE CONNECTIO
N
STERICYCLE
Net Income(Millions)
$1,630 $ 273.6 $290.2 $99.1 $118.4
Waste Management Company Analysis 39
Figure 8
In Table 9 you can see that Waste Management has more net
income than other competitors, $1,630 million. This can be
attributed to their large market share and varied geographical
presence. They are followed by Republic Services at $290.2
million and Allied Waste at $273.60 million. Stericycle and Waste
connection have a relatively small portion of the net income
presented. In Figure 8 the graphical representation of Table 9 is
presented.
Waste Management Company Analysis 40
Sales Growth
Table 10
Sales Growth Rate
WMI ALLIED REPUBLIC SERVICES
WASTE CONNECTIO
N
STERICYCLE
Sales Growth Rate(2003-2007)
3.49% 3.17% 6.07% 14.69% 18.36%
Figure 9
Waste Management Inc. has lower sales growth rates than all
other competitors, except Allied Waste. In Table 10 and Figure 9,
these trends can be observed. The top two competitors of Waste
Management, Allied and Republic, have growth rates of 3.17% and
6.07% respectively. These trends signal that the smaller firms in
the industry are rapidly acquiring new customers. This explains
the higher sales growth of the smaller firms. Waste Management is
so geographically diversified that they are struggling to create
Waste Management Company Analysis 41
sales growth. They are concentrated on growth through
acquisitions, new technologies, and maintaining their market
share.
Revenue Per Employee
Table 11
Revenue Per Employee
WMI ALLIED REPUBLIC SERVICES
WASTE CONNECTIO
N
STERICYCLE
Revenue Per Employee
$282,477 $267,908
$245,369
$198,773
$160,345
Figure 10
In Table 11 and Figure 10, data shows that Waste Management
has the highest return per employee. The firm is showing a return
of $282,477 per employee, which is more than their top two
competitors, Allied Waste and Republic Services. Their return per
Waste Management Company Analysis 42
employee is $267,908 and $245,369 respectively. Generally, the
more employees a company has the less the per head revenue.
However, Waste Management has the highest number of employees,
and still has a higher return. They are utilizing their workforce
efficiently to create value for the company.
Average Operating Income
Table 12
Average Operating Margin
WMI ALLIED REPUBLIC SERVICES
WASTE CONNECTION
STERICYCLE
Average Operating Margin (2003-2007)
14.45% 16.40% 16.72% 22.98% 25.75%
Figure 11
In Table 12 and Figure 11 the operating margins are
presented. Operating margin is calculated by dividing operating
income by the net sales. This calculation shows how much money
the firm is actually generating for each dollar of sales. This
Waste Management Company Analysis 43
calculation can show efficiency issues. Investors would like to
see this margin increasing over time. Waste Management has the
lowest operating margin, 14.45%. Allied has 16.40% and Republic
has 16.72%. Stericycle and Waste Connection are actually
generating more dollars of sales and have better operating
expenses than the three largest firms in the industry.
Net Profit Margin
Table 13
Net Profit Margin
WMI ALLIED REPUBLIC SERVICES
WASTE CONNECTION
STERICYCLE
Average Net Profit Margin (2003-2007)
8.05% 2.89% 8.91% 10.90% 13.17%
Figure 12
Waste Management Company Analysis 44
In Figure 12 the last five year average for net profit
margin is presented. The numbers are also shown in Table 13. For
Waste Management their average net profit margin is 8.05%, which
is only one above the lowest in the industry competitors
presented. This should come as no surprise, since they are the
lowest in the average operating margin, as well. Again, Waste
Connection and Stericycle have better net profit returns over the
past five years than the top three competitors.
Return on Investment
Table 14
Return on Investment
WMI ALLIED REPUBLIC SERVICES
WASTE CONNECTIO
N
STERICYCLE
Return On Investment (2003-2007)
6.00% 1.36% 6.57% 5.59% 9.53%
Waste Management Company Analysis 45
Figure 13 Table 14 and Figure 13 show the return on investment for the
firms over the past five years. Figure 13 visually depicts the
return on investment Waste Management had over the five year
average, 6%. Republic has provided a return on investment of
6.57%, and Stericycle has the biggest return on investment of
9.53%. Allied Waste has the worst return on investment.
Net Income Per Employee
Table 15
Net Income Per Employee
WMI ALLIED REPUBLIC SERVICES
WASTE CONNECTION
STERICYCLE
Net Income Per Employee
$24,599 $15,311 $24,031 $20,044 $19,812
Waste Management Company Analysis 46
Figure 14 Figure 14 and Table 15 represents net income per employee.
Again, Waste Management has the highest net income for employee
at $24,599. So Waste Management, while having a lower operating
and net profit margin, actually get more revenue per employee
than their competitors. This is in large part due to recent
restructuring strategies the firm has undertaken. They have
dismissed many of their administrative employees in order to
reduce overhead costs. These figures denote that Waste Management
is efficient in generating revenue through their employees.
Conclusion of competitive analysis
Waste Management is certainly the biggest in the industry.
They outrank their competitors in revenue, net income, revenue
per employee, return on investments, and net income per employee.
However, they do not lead in every measurement contained in Table
7, the competitive analysis. They need to evaluate their sales
Waste Management Company Analysis 47
growth, average operating margin, and average net profit margins.
The only real threat to Waste Management is the possibility of a
loss of market share, or the merger of their next two largest
competitors. Stericycle and Waste Connection have the potential
to be an attractive acquisition target for Waste Management or
the other firms. They have high sales growth and operating profit
margins.
Significant Competitors
The waste management industry deals with five different
categories of waste, created by individuals or organizations.
Most of the firms competing within the industry provide similar
services. This is why in large part a firms’ competitive
advantage depends on its number of geographic locations,
resources, services, and price. Since Waste Management has such
geographically diversified holdings they able to service more
people, than any of their competitors. The next two competitors,
based on market share are Allied Waste, with 13%, and Republic
Services, with 6.6% (Scharf, 2008). These are the two major
competitors that Waste Management must contend with. Given the
fact that these two have started recent merger talks, Waste
Management should be watching their moves very carefully. A brief
description of these two competitors is discussed below.
Allied Waste Industries
Waste Management Company Analysis 48
Allied Waste Industries is headquartered in Phoenix, AZ.
They also have locations in 37 states in the United States and
Puerto Rico. They also deal with non-hazardous solid waste
management, waste collection, recycling, and disposal services to
individual and industrial clients. Their services start from
door-to-door collection through the end process of disposal. They
have over 8 million residential, commercial and industrial
customers in over 100 major markets. They employ 23,000 employees
and own 291 collection companies, 161 transfer station, 161
active landfills, and 53 recycling facilities. During the 2007
operating year they also expanded their methane gas collection
projects (Allied Waste Annual Report, 2007).
Allied Waste’s business strategy encompasses the following:
vertical integration of waste services, improving operating
efficiencies through the implementation of best practices,
focusing on improved customer service, improving and maintaining
market position, and to provide financial and system support to
the ongoing operations of the organization (Allied Waste Annual
Report, 2007).
Republic Services Inc.
RSI is the second major competitor of Waste Management
Industries. Their corporate office is at Florida and they operate
in 21 states. The company provides services to commercial,
industrial, municipal, and residential customers. They have 136
Waste Management Company Analysis 49
collection facilities, 94 transfer station, 58 solid waste
landfills, and 33 recycling facilities. Their strategy is to
focus on high growth markets (Republic Services Annual Report,
2007).
Republic seeks to manage their free cash flow to maximize
shareholder value by reinvesting in the existing fleet,
equipment, and landfill facilities. Their goal is to provide
higher levels of customer service and to seek growth of revenue.
Their growth strategy is to increase market share through
internal growth or acquisitions. They also hope to improve
margins through the acquirement of economies of scale and scope,
cost efficiency, and asset utilization. They are striving to
acquire more commercial, residential, and industrial customer
contracts through sales and marketing strategies (Republic
Services Annual Report, 2007).
In Table 16 the growth rate for sales is presented, along
with net income and revenue for each company.
Table 16
Competitor Comparison
Organization Relative Market Share
Growth Rate
WMI 28.5% 2.2%AW 13% 5.1%RSG 6.6% 7.2%
Waste Management Company Analysis 50
This shows that Waste Management should be particularly
concerned with the growth strategies of both Allied Waste and
Republic services. The sales growth of Waste Management is only
2.2%, while Allied Waste has a 5.1% growth rate, and Republic has
a 7.2% growth rate (Scharf, 2008). The growth strategies of both
companies are a direct threat to Waste Management.
Allied and Republic are considering acquisitions to gain
even more market share, and focusing on the high growth arenas.
They could very easily take over Waste Management’s market share.
Given that Allied and Republic are considering a merger, Waste
Management will need to react quickly. If those two companies
merge then they will have locations in predominantly the same
geographic regions as Waste Management. This will cause both
companies to compete over customers. This will also give the new
combined companies around the same asset quantities as Waste
Management. This would take away Waste Management’s strength in
landfill sites, transfer stations, and the size of their trucking
fleet. If the merger were to happen, this would move the
importance on to strategies focusing on increased efficiencies,
customer service, and price.
Waste Management Company Analysis 51
Competition Core Competencies
Allied Waste
Allied Waste Industries, Inc. provides solid waste
collection, transfer, recycling and disposal services for more
than 8 million customers.
Collection
Allied Waste provides collection services under four service
lines: commercial, residential, roll-off and recycling
collection. They service residential, commercial, and municipal
customers. They have 300 collection locations that provide
curbside pick-up and transportation directly to the landfill or
transfer station. They service over 10 million customers and like
Waste Management, they also use trucks and rail systems to
transport waste (Allied Waste Annual Report, 2007).
Transfer Stations
Allied serves its customers through its use of transfer
stations to effectively consolidate solid waste before transport
to landfill facilities. On December 31, 2007 Allied Waste owned
or operated 161 transfer stations. These stations help to reduce
costs by compacting waste material prior to transportation
(Allied Waste Annual Report, 2007).
Recycling
Allied Waste operates 53 recycling facilities. These
facilities sort, and process paper, cardboard, aluminum, and
Waste Management Company Analysis 52
other metals. They sell the resulting recycled products at the
current commodity prices.
Landfills
To service its customers Allied Waste owns or operates
landfills for its solid waste collection. At the end of 2007, the
company had a network of 161 active landfills. They do not
possess any hazardous landfill site permits, like Waste
Management (Allied Waste Annual Report, 2007).
Gas-to-Energy
Allied Waste also has 50 gas-to-energy sites for the
collection of methane gas in the production of energy. Waste
Management also has this core competency (Allied Waste Annual
Report, 2007).
Republic Services, Inc.
Republic Services operations include the collection, transfer,
and disposal of solid waste.
Collection
Republic Services provides non-hazardous solid waste
collection services for commercial, industrial, municipal and
residential customers through 136 collection companies located in
21 states. Again, they provide curbside service for their
residential customers. They also service commercial, industrial,
and municipal customers. They do not possess hazardous waste
landfill sites (Republic Services, Annual Report, 2007).
Waste Management Company Analysis 53
Transfer Stations
As of December 31, 2007, Republic Services owned or operated
94 transfer stations. Waste at these facilities is compacted and
transferred to trailers for transport to landfills or recycling
facilities. Unlike Waste Management and Allied they do not have
rail systems to transport waste on (Republic Services, Annual
Report, 2007).
Landfills
Republic Services operates 58 landfills, some of which
accept non-hazardous special waste, including utility ash,
asbestos and contaminated soil (Republic Services, Annual Report,
2007).
Recycling
In addition, Republic Services has 33 recycling facilities
and other recycling operations. Recycled materials are salvaged
and sold to third parties (Republic Services, Annual Report,
2007).
Summary of Core Competencies
It is easy to see from the listing of the core competencies
of Waste Management, Allied Waste, and Republic Services that
each has similar core competencies. They all have landfills,
transfer stations, and recycling centers. Allied Waste and Waste
Management both process methane gas into energy, while only Waste
Management has the capability to transfer waste into energy. This
Waste Management Company Analysis 54
is why we have identified waste-to-energy as their most important
core competency. This is not to say that this cannot be copied by
their competitors in the future, but presently, it is their
unique competency.
In addition each firm has managerial knowledge competencies.
These firms all have industry experience in the various
competencies listed above, with the exception of the gas and
waste-to-energy areas. All the firms seem to pursue the same cost
saving initiatives and customer service improvements.
Due to Waste Management’s geographic presence, size, and
asset base they are not particularly vulnerable to the
competition, as it stands. Waste Management has the resources to
continue advanced research in energy generation alternatives.
They also have locations in more states than their other two
competitors. Their most vulnerable point would be a loss of
market share, since most of their revenues come from their
collection services. Participants in the waste industry tend to
follow the trends and do not pursue direct attacks on one
another. This might be due to Waste Management’s size, because
quite frankly, neither of Waste Management’s competitors has had
the geographic presence to give them a run for their money.
However, this just might happen if Allied and Republic merge.
Waste Management Company Analysis 55
Key Factors of Competition
Companies in the waste management industry compete mainly on
geographic location, pricing, and quality of operations (Republic
Services Annual Report, 2007). Other factors that can be
considered as factors to competition include market trends toward
recycling, cost efficiencies, and regulatory licensing.
Geographic Location
Geographic location plays a major role in a firms’ ability
to compete in this industry. Waste Management has more locations
than either Allied or Republic. This gives Waste Management a
competitive advantage over their rivals. This is one reason
Allied and Republic are considering a merger (Waste Management
Annual Report, 2007).
Pricing
With volumes declining, firms in this industry are instead
turning to organic growth to support operations, in the form of
price increases. It is important for firms’ to control costs and
minimize the amount of cost passed on to customers. If
competitors are in the same geographic region, but one has higher
pricing, it is likely they will lose customers. The industry
trends say that it is unlikely the price structure will differ
drastically between firms, because the bigger firms are hesitant
about going into a price war (Value Line Republic Services,
2008).
Waste Management Company Analysis 56
Quality of Operations
Firms are competing more and more on customer service. Since
each provide relatively the same services, and have the same
pricing structure, firms must improve customer service. This
includes “right price” strategies by Waste Management and similar
pricing strategies from Republic and Allied (Waste Management
Annual Report, 2007).
Increases in Recycling
Trends in the industry are also moving toward an increased
focus on recycling and environmentally friendly programs.
Environmental pollution is one of the biggest problems that this
industry has to solve. Increased demand from customers and
government regulators for environmentally friendly solutions is
driving the competition in the recyclable commodities arena.
Firms are increasingly competing on their ability to perform
tasks in an environmentally friendly manner, and reduce their
dependence on new landfills for sustainability.
Cost Effectiveness
With decreases in volumes, all the firms in the industry are
working on cost efficiency programs. This enables the firms to
reduce the amount of cost it passes on to the customer. This is
very important in the geographic locations that have more than
one competitor. It also has added benefits to the company of
Waste Management Company Analysis 57
increasing profits, the utilization less resources, and the
potential to earn more return.
One of the main factors in the waste industry is fuel. Fuel
is one of the most important factors, because of collection
trucks. Firms have thousands of trucks, which use millions of
gallons of fuel for collection from door to door. Waste
Management has recently started to explore alternative fuel usage
in their fleet (Waste Management, 2008).
Governmental Permits
One of the other key factors to competition is the ability
of the firms to obtain and maintain government permits for
operations. They also have to ensure compliance with local and
federal regulatory laws that could close them down. Those
companies that can obtain the required permits have a competitive
advantage over those firms that cannot.
Competitive Summary
In the waste industry individuals, municipalities,
commercial, and industrial organizations define customer
expectations. With the government regulations in the industry
firms are rule takers. They have very little lead-way to be a
rule breaker. If they do not follow set industry regulations they
can be fined or shutdown. Prices remain relatively in-line among
competitors. There have not been any price wars in the waste
industry. Waste Management, as well as, Allied and Republic have
Waste Management Company Analysis 58
largely grown organically over the past year. With increased fuel
prices and operational costs, the cost advantages Waste
Management has seen in the past has been eroded. The competition
is becoming increasingly dependent on cost savings, to generate
higher returns.
Waste Management is positioned well within the growth
segments of recycling and energy generation. They have unique
operations in the waste-to-energy and more recycling operations
than their competitors. They are strong in every segment they
participate in due to their geographic locations, resources, and
abilities. However, Allied is quickly moving into the gas-to-
energy segment, and if they merge with Republic they will have
nearly the same asset strength as Waste Management. Right now
Allied Waste and Republic are positioned as the number two and
three competitor in disposal, transfer, and recycling segments
(Waste Management, 2008).
In the next section we will review key ratios of Waste
Management and their key competitors. There will also be
discussions on how Waste Management can improve these ratios
against their competitors.
Financial Analysis
Financial Analysis: Waste Management, Inc.
This analysis will focus on the financial performance of
Waste Management, Inc. and its top two competitors in the solid
Waste Management Company Analysis 59
waste industry, Allied Waste and Republic Services for the years
2004 through 2007. It is hoped that through this analysis the
financial strengths and weaknesses of Waste Management and its
major competitors will be recognized; strengths can be exploited
and weaknesses can be improved. The financial data presented in
this analysis was compiled from each company’s 2007 annual report
and form 10K, Morningstar, and Yahoo Finance. The majority of the
ratios were calculated independently.
The financial analysis includes revenue and income analysis,
market value analysis, and financial ratios. The ratios are
compared with Allied Waste and Republic Services, and are
presented in the following segments: profitability ratios,
liquidity ratios, leverage ratios, turnover ratios, and solvency
ratios. In addition, under each ratio segment, recommendations
for improvement are presented.
Corporate Profiles
The waste management industry is made up primarily of three
companies; Waste Management Inc., Allied Waste Industries, and
Republic Services. Waste Management has the largest market share
at 29%, followed by Allied Waste at 13%, and Republic Services at
7% market share. The remaining 51% of the industry is highly
fragmented among many smaller competitors.
Waste Management Company Analysis 60
Figure 15 Industry Market Share
Waste Management, Inc. (WMI)
Waste Management, Inc. provides integrated waste services in
the United States, Puerto Rico, and Canada. It offers collection,
transfer, recycling, disposal, and waste-to-energy services. The
company also provides additional waste management services, such
as on-site services, methane gas recovery, and third-party
subcontracted and administrative services. It services
commercial, industrial, municipal, and residential customers, as
well as other waste management companies, electric utilities, and
governmental entities. It is currently the largest waste disposal
company in North America, and is based in Houston, Texas
(www.finance.yahoo.com/q?s=WMI).
The revenue of Waste Management can be broken into six
segments that include: collection, landfills, transfer stations,
Industry Market Share
29%
13%
7%
51%
WMIAWRSGOthers
Waste Management Company Analysis 61
recycling, and waste-to-energy. Waste Management receives 56% of
its revenue from collection services, 20% from landfill, 11% from
transfer, 8.3% from recycling, and 6% from waste-to-energy.
Figure 16 shows the breakout of these revenues for the 2007 year.
Revenue Sources Waste Management, Inc.
55%
20%
11%
8% 6% Collection
Landfill
Transfer
Recycling
Waste-to-Energy
Figure 16 Revenue Sources WMI Data: Annual Report, WMI
The mix of operating revenues from Waste Management’s
different services is reflected in the Table 17. Recycling showed
an increase of $224 million for 2007, while the rest of the
services showed decreases. These decreases were due to lower
volumes, as a result of significant slowdown in residential
construction (Annual Report, WMI, 2007).
Table 17
Waste Management Company Analysis 62
Operating Revenues - WMI
2007 2006 2005Collection 8,714 8,837 8,633Landfill 3,047 3,197 3,089Transfer 1,654 1,802 1,756Wheelabrator 868 902 879Recycling and other 1,298 1,074 1,183Intercompany -2,271 -2,449 -2,466 Total 13,310 13,363 13,074
Data: www.wastemanagement.com
Allied Waste Industries, Inc. (AW)
Allied Waste Industries, Inc. operates as a non-hazardous
solid waste management company in the United States and Puerto
Rico. The company provides collection, transfer, recycling, and
disposal services for residential, commercial, and industrial
customers. Allied Waste Industries is currently the number two
waste management company and is headquartered in Phoenix,
Arizona(www.finance.yahoo.com/q?s=AW). In Figure 17 the revenue
sources for Allied Waste are presented for 2007.
Waste Management Company Analysis 63
Figure 17 Revenue Sources, AW Data: Annual Report, AW
Republic Services, Inc. (RSG)
Republic Services, Inc. provides non-hazardous solid waste
collection and disposal services for commercial, industrial,
municipal, and residential customers in the United States. It is
currently ranked as the number three waste management company in
the United States. Republic Services, Inc. was founded in 1996
and is headquartered in Fort Lauderdale, Florida
(www.finance.yahoo.com/q?s/RSG). In Figure 18 the revenue sources
for Republic Services are presented by percentage for 2007.
Revenue Sources - Allied Waste
70%
14%
7% 4% 5% Collection Landfill Transfer Recycling Other
Waste Management Company Analysis 64
Figure 18 Revenue Sources, RSG Data: Annual Report, RSG
Table 18 summarizes the revenue sources for all companies in
percentages for 2007.
Table 18
Revenue Sources
Revenue Sources WMI AW RSG Collection 56% 70% 76% Landfill 20% 14% 9% Transfer 11.0% 7% 9% Recycling 8.3% 4% 6% Waste-to-Energy 6% 0% 0% Other 0% 5% 0%Data: Annual Report, 2008 www.wastemanagement.com, www.awin.com,
www.republicservices.com
Growth Analysis
Given the fact that 51% of the market is controlled by many
small firms, growth is a vital opportunity for firms in the waste
Revenue Sources - Republic
Services
76%
9%9% 6%
Collection Landfill Transfer Recycling
Waste Management Company Analysis 65
industry. The growth analysis section includes data and comments
covering the areas of revenue (sales) and income.
Revenue (sales)
As of December 2007, revenues at Waste Management were
$13.31 billion, down .37% from 2006 ($13.36 billion). Allied
Waste had 2007 revenues of $6.1 billion, up 2.5% from 2006 ($5.9
billion). Republic Services revenue for 2007 was $3.19 billion,
up 3.9% from 2006 ($3.07 billion).
The revenues for Waste Management were lower by $53 million
in 2007, primarily as a result of volume declines and
divestitures and offset largely by increased yields from the base
business and higher recycling commodity prices (Annual Report,
WMI, 2007). Divestures included underperforming and non-strategic
operations. The operations divested were mainly collection
services, and a few recycling and transfer stations. The revenues
for Allied Waste increased 2.5% in 2007; $160.2 million primarily
as a continued result of price growth from a 6% price increase in
2005 (Annual Report, AW, 2007). Republic Services had an increase
of 3.9%, with revenues increasing $105.6 million, primarily due
to a pricing initiative instituted in 2003 (Annual Report, RSG,
2007). Figure 19 reflects revenue results for Waste Management
from 2004 through 2007:
Waste Management Company Analysis 66
Figure 19 Waste Management Revenue Data: www.morningstar.com
The Table 19 summarizes the four-year revenues for each
company:
Table 19
Revenue
Revenue 4-year
2004 2005 2006 2007Waste Management
12,516.0 13,074.0 13,363.0 13,310.0
Allied Waste 5,362.0 5,612.2 5,908.5 6,068.7
Republic Services
2,708.1 2,863.9 3,070.6 3,176.2
Data: www.morningstar.com
Net Income
Net income is determined by subtracting cost of goods sold,
depreciation, taxes, interest, and other expenses from revenue.
Waste Management Revenue
12,000.012,200.012,400.012,600.012,800.013,000.013,200.013,400.013,600.0
2004 2005 2006 2007
Revenue
Waste Management Company Analysis 67
Although Waste Management’s revenue was down, the company’s
net income was up 1.2%, or $14 million, primarily from decreases
in operating expenses, as well as significant returns provided by
its recycling operations (Annual Report, WMI, 2007). Figure 20
shows the net income trend for Waste Management in millions, from
2004 through 2007:
Figure 20 Waste Management Net Income
Data: www.morningstar.com
Allied Waste had a significant net income increase in 2007
of 70% or $112.7 million over 2006 net income. This is
attributable to revenue increases of 6% during 2007 and a
decrease in operating expenses of 1.7% from 2006 to 2007 (Annual
Report, AW, 2007).
Waste Management Net Income
0.0
200.0
400.0
600.0
800.0
1000.0
1200.0
1400.0
2004 2005 2006 2007
Net Income
Waste Management Company Analysis 68
Republic Waste had a moderate net income increase of 3.8% or
$10.6 million, the continued result of price initiatives in 2003
(Annual Report, RSG, 2007).
Table 20 summarizes the four-year net income amounts for
each company:
Table 20
Net Income
Net Income - 4 Yr.
2004 2005 2006 2007Waste Management
939.0 1,182.0 1,149.0 1,163.0
Allied Waste 49.3 203.8 160.9 273.6Republic Services
237.9 253.7 279.6 290.2
Data: www.morningstar.com
Table 21 ranks the revenue and net income for the three
companies for the year 2007. It is clear that Waste Management
has over double the revenue of Allied Waste, and over quadruple
the revenue of Republic Services. Waste Management also has four
times the net income of Allied and Republic.
Table 21
Company Rank – Revenue for year 2007
Company Rank – Revenue - 2007
Highest Middle Lowest
Revenue WMI - $13,310
AW – 6,068.7
RSG – 3,176.2
Net Income WMI - $1,163
RSG – 290.2
AW – 273.6
Data: www.morningstar.com
Waste Management Company Analysis 69
Market Value Analysis
In this section, will be presented several ratios used in
determining the value of a company’s stock. It is important to
note that none of these ratios should be used by themselves in
trying to determine whether a stock is over or undervalued by the
market. These ratios include earnings per share, price earnings,
price to sales, price to book, and price to cash flow. Each one
will be explained and then shown in Table 6.
Earnings per Share
The earnings per share, represents the amount of net income
that a company makes per share of stock that is available on the
market (Business Ratios, 2008). Companies calculate the earnings
per share by dividing the total earnings by the number of shares
outstanding. All of the companies reported an increase for 2007
over 2006 numbers.
Price to Earnings (P/E)
The price/earnings (P/E) ratio is determined by dividing the
market value per share of stock by the earnings per share of
stock. This ratio gives the company an idea of what the public is
willing to pay per share of stock, based on the company’s
earnings (Business Ratios, 2008). The Table 6 shows that Waste
Management has the lowest P/E ratio among its competitors. So,
investors are only willing to pay $15.80 per $1 of earnings.
Waste Management Company Analysis 70
Price to Sales (P/S)
The Price to Sales, or P/S ratio, is determined by dividing
the market capitalization of the stock by the total revenues of
the company. Like price earnings, the P/S reflects the value
placed on the sales by the market. It is desired to have a lower
the price to sales ratio because the investor is paying less for
each $1 of sales (Business Ratios, 2008).
Price to Book (P/B)
The Price to Book looks at market value of stock compared to
the book value of the stock. It is calculated by taking the
current price per share and dividing by the book value per share.
As with the price to sales, a lower price to book ratio can
signal a good investment for investors (Business Ratios, 2008).
Price to Cash Flow
The Price to Cash Flow is determined by dividing the stock’s
price by the cash flow per share. Lower numbers, relative to the
industry and competitors, suggests the market has undervalued the
stock (Business Ratios, 2008). Waste Management’s price to cash
flow is under the industry average of 14.0%.
Table 22 organizes all of these ratios and compares the
three companies.
Table 22
Market Value Analysis
Waste Management Company Analysis 71
2004 2005 2006 2007Earnings per shareWaste Management $1.61 $2.09 $2.10 $2.23 Allied Waste $0.11 $0.42 $0.32 $0.71 Republic Services $1.08 $1.20 $1.39 $1.51
Price/EarningsWaste Management 18.7 14.5 17.5 15.8Allied Waste 84.0 20.3 37.2 24.5Republic Services 21.9 21.5 19.7 22.2 S&P 500
19.0 17.3 16.8 16.5
Price/SalesWaste Management 1.4 1.4 1.5 1.3Allied Waste 0.6 0.5 0.7 0.7Republic Services 1.9 2.0 1.9 2.0 S&P 500 1.6 1.5 1.6 1.5
Price/BookWaste Management 2.9 2.7 3.2 2.8Allied Waste 1.3 1.1 1.5 1.3Republic Services 3.0 2.8 2.9 2.7 S&P 500 3.0 2.8 2.9 2.7
Price/Cash FlowWaste Management 7.9 7.4 8.0 7.0Allied Waste 4.6 3.9 4.5 3.9Republic Services 7.7 7.5 11.0 9.3 S&P 500 11.5 10.8 11.1 11.6Data: www.morningstar.com
Table 23 ranks each company in the market value analysis.
Table 23
Waste Management Company Analysis 72
Company Rank – Market Value Analysis
Earnings per Share WMI - $2.23 RSG - $1.51
AW - $0.71
Price/Earnings WMI – 15.80 RSG - 22.20
AW – 24.50
Price/Sales AW – 0.70 WMI - 1.30 RSG – 2.0 Price/Book WMI - 2.80 RSG - 2.70 AW - 1.30 Price/Cash Flow RSG - 9.3 WMI - 7.0 AW - 3.9Data: www.morningstar.com
Waste Management has the highest earnings per share and
price to book of $2.23 and $2.80 respectively. They have the
lowest price to earnings, $15.80, perhaps signaling a good
investment opportunity. However it is in the middle for
price/sales and price/cash flow.
Stock Prices
The stock price, in Table 8, shows the high and lowest stock
price for each company for the years 2004 through 2007. Because
of Republic Services’ lower debt and high net profit margin the
market has rewarded it with a steady increase in its high market
price. Likewise, the market has rewarded WMI with a consistent
increase in stock price. The market has not yet recognized Allied
Waste’s efforts in decreasing its debt and increasing its net
profit. Table 24 records the stock high-and-low prices for each
company.
Table 24
Stock Prices – Highs and Lows
Waste Management Company Analysis 73
2004 2005 2006 2007Waste Management - High
31.1 30.71 38.35 40.38
Waste Management - Low
26.56 27.21 33.28 32.67
Allied Waste - High 14.28 13.5 9.13 13.99Allied Waste - Low 8.2 9.78 6.98 9.3
Republic Services - High
22.36 25.39 28.66 34.85
Republic Services - Low
16.63 20.23 25.3 26.61
Data: www.financeYahoo!
Profitability Ratios
Profitability ratios show the combined effects of liquidity,
asset management, and debt on operating results. The
profitability ratios discussed in this section are the gross
profit margin, operating profit margin, net profit margin, return
on assets, and return on equity.
Gross Profit Margin
The gross profit margin is calculated by dividing the gross
profit by revenue (Brigham, 2004). Gross profit is the amount of
revenue dollars remaining after the cost of goods sold has been
deducted. If the gross profit margin is declining over time, it
may indicate that your inventory management needs to be improved,
or that your prices are not rising as fast as the cost of goods
(Business Ratios, 2008).
Waste Management increased its gross profit margin 1.1%
primarily through a decrease in its operating expenses of $185
Waste Management Company Analysis 74
million (Annual Report, WMI, 2007). Allied Waste increased its
gross profit margin by almost 2% in 2007, primarily a result of
revenue gains of $160 million (Annual Report, AW, 2007). Although
Republic Services reported an increase of revenue of $105.9
million, its gross profit margin decreased by .2% due to a $72.9
million increase in the cost of goods sold (Annual Report, RSG,
2007).
Table 25 reflects the gross profit margins for each company.
Table 25
Gross Profit Margin
Gross Profit Margin
2004 2005 2006 2007
Waste Management
34.20% 33.90% 35.70% 36.80%
Allied Waste 37.10% 34.70% 35.70% 37.60%Republic Services
36.70% 37.00% 37.30% 37.10%
Data: www.wastemanagement.com , www.awin.com ,
www.republicservices.com
Operating Profit Margin
The operating profit margin is also known as coverage ratio
and measures company’s earnings before interest and taxes
(Business Ratios, 2008). It is determined by dividing the
operating income by revenue. This ratio indicates how much money
the company is making on its primary business operations. It
shows the percentage of each sales dollar remaining after all
Waste Management Company Analysis 75
normal costs of operations, and indicates whether the overall
costs are trending up or down (Business Ratios, 2008).
Waste Management posted an increase in operating profit
margin of 1.7% primarily from realizing a deduction in
depreciation and amortization of $75 million from 2006 to
2007(Annual Reports, WMI, 2007). Allied Waste saw an increase of
1.4%, primarily from a decrease in the cost of goods sold of
$87.2 million (Morningstar, 2008). Republic Services’ operating
profit margin remained unchanged from 2006 at 16.9%.
Table 26 summarizes the operating profit margins for each
company.
Table 26
Operating Profit Margin
Operating Profit Margin
2004 2005 2006 2007
Waste Management 13.60% 13.10% 15.20% 16.90%Allied Waste 16.50% 16.00% 16.00% 17.40%Republic Services
16.70% 16.70% 16.90% 16.90%
Data: www.morningstar.com
Net Profit Margin
The net profit margin is calculated by dividing the net
profit by revenues. This shows you how much money the company has
left after it has deducted all expenses.
Waste Management’s net profit margin increased 0.15% for
2007. Waste Management’s net profit margin shows that it made a
profit of 8.74% on each dollar of sales in 2007. Allied Waste’s
Waste Management Company Analysis 76
net profit margin gained 1.8%, due to increased revenue, and
decreased COGS of $87.2 million (Annual Report, AW, 2007).
Republic Services net profit margin increased slightly as a
result of increased revenue from pricing.
Table 27 summarizes the net profit margins for each company.
Table 27
Net Profit Margin
Net Profit Margin
2004 2005 2006 2007
Waste Management 7.50% 9.04% 8.59% 8.74%Allied Waste 0.92% 3.55% 2.67% 4.51%Republic Services
8.78% 8.86% 9.10% 9.13%
Data: www.morningstar.com
Return on Assets
The return of assets ratio gives an indication as to how
effective a company is using its assets to generate earnings.
Return on assets is made up of two components: net margin and
asset turnover. Net margin is found by dividing net income by
sales. It reveals what percentage of each dollar in sales a
company retains. Asset turnover is found by dividing sales by
assets. It reveals how well a company does in producing sales
from its assets. You multiply the two components to determine
return on assets. Companies with high return on assets, compared
to their peers, are more efficient at using assets to generate
profits (Stock.about.com, 2008).
Waste Management Company Analysis 77
In 2007 Waste Management’s return on assets was 5.70% which
means that WMI made 5.70% on each dollar of assets. This is a .2%
increase from 2006. Allied Waste increased its return on assets
by .8%, from 1.17% in 2006 to 1.97% in 2007. This was a result of
Allied increasing its net profit by price increases and decreases
in interest expense (Annual Report, AW, 2007). Republic
Services increased its return on assets by .29% due to increases
in net margin, through price increases (Annual Report, RSG,
2007).
Table 28 shows the return on assets for each company.
Table 28
Return on Assets
Return on Assets
2004 2005 2006 2007
Waste Management
4.52% 5.62% 5.51% 5.70%
Allied Waste 0.36% 1.50% 1.17% 1.97%Republic Services
5.28% 5.63% 6.23% 6.52%
Data: www.morningstar.com
Return on Equity
The return on equity measures how well the company did
earning money for its investors. The return on equity is the
ratio of net income to stockholders’ equity. The calculation is
determined by dividing net income earned by the company by the
total shareholders’ equity (Business Ratios, 2008).
Waste Management Company Analysis 78
In 2007, Waste Management’s return on equity was 19.36%
which means that Waste Management made 19.36% on each dollar of
shareholders’ equity (Morningstar, 2008).
Allied Waste earned 8.36% on each dollar of shareholders’
equity, an increase of 2.83%. This was primarily due to a $112.7
million increase in its net income (Morningstar, 2008).
Republic Services reported a return on equity of 21.29%.
This means that it made 21.29% on each dollar of shareholders’
equity. This was the result of lower shareholder equity, in
combination with a higher net income for 2007 (Morningstar,
2008).
Table 29 shows the return on equity for each company.
Table 29
Return on Equity
Return on Equity 2004 2005 2006 2007Waste Management 16.28% 19.55% 18.62% 19.36%Allied Waste 2.21% 8.50% 5.80% 8.63%Republic Services
12.60% 14.59% 18.47% 21.29%
Data: www.morningstar.com
Return on Assets Trend Analysis
Waste Management’s return on assets has trailed the industry
five-year average of 5.71% from 2004 to 2006, but was very close
to matching the average in 2007. Figure 21 is a trend analysis
depicting WMI return on assets compared against the industry
five-year average.
Waste Management Company Analysis 79
Figure 21 Trend Analysis: Waste Management ROA vs. Industry
Data: www.reuters.com
Recommendations for Improvement
Table 30 summarizes the profitability ratios for the three
companies.
Table 30
Company Rank – Profitability Ratios
Waste Management Return on Assets
0
1
2
3
4
5
6
2004 2005 2006 2007
Ret
urn
Per
cen
tag
eWMI Returnon AssetsIndustry 5 yraverage
Waste Management Company Analysis 80
Company Rank Highest Middle LowestGross Profit Margin AW - 37.6% RSG -
37.1%WMI - 36.8%
Operating Profit Margin
AW - 17.4% WMI - 16.9%
RSG - 16.9%
Net Profit Margin RSG - 9.13% WMI - 8.74%
AW – 4.51%
Return on Assets RSG - 6.52% WMI - 5.70%
AW - 1.97%
Return on Equity RSG - 21.29%
WMI - 19.4%
AW - 8.63%
Data: www.morningstar.com
To improve its gross profit margin ratio, net profit margin,
return on assets, and return on equity, Waste Management should
increase its revenue through pricing, and/or decrease its cost of
doing business. Increasing prices could cause sales to fall as
the pricing environment is very competitive. Price increases
require a careful reading of inflation rates, competitive
factors, and basic supply and demand of the services
(Entrepreneur, 2008). Where feasible, Waste Management should
continue to increase pricing through analyzing each customer
account individually (called right-pricing). Specific decisions
on pricing, cost control, efficiency, containing interest
expenses, and productivity will affect net income.
Controlling variable costs will improve the gross profit
margin because variable expenses are recorded as operating costs
or cost of goods sold (Business Ratios, 2008). Variable costs can
be decreased by managing labor, maintenance and repair,
subcontractor costs, supplies, utilities, fuel, and transfer and
Waste Management Company Analysis 81
disposal costs. For supplies, (containers and equipment) the
company can explore the option of buying in bulk and eliminating
wasteful spending in areas of packaging and shipping fees.
Maintenance and repair costs can be reduced by keeping up-to-date
maintenance systems in place. For labor, utilities, and
subcontractor costs, the company needs to evaluate the current
routes they have for efficiency. Once efficiencies have been
evaluated they can take corrective actions to help reduce these
costs. It might be cheaper for them to outsource some of their
services or modify pickup schedules.
Additionally, Waste Management recognized a decrease in its
risk management cost of $74 million, a 25.4% change from 2006 to
2007. This was accomplished by focusing on safety, and reducing
accident and injury rates. Waste Management should continue their
efforts in this area.
Fuel costs were significantly higher, especially in the
fourth quarter. Waste Management received $29 million in 2007
from fuel surcharges. However, total fuel expenses for the year
was $581 million (Annual Report, WMI, 2007). Waste Management
should investigate alternative fuel sources for its fleet,
continue to monitor its fleet routes to reduce mileage and
maintenance costs, and continue conversion of its truck fleet
from diesel to natural gas.
Waste Management Company Analysis 82
The operating profit margin includes cost of goods sold,
selling, general, and administrative costs. In 2007 Waste
Management had an increase in its SG&A costs of 3.2%. This is in
large part due to the strategic initiatives the firm is taking to
improve operations and processes in the future. To improve this
area Waste Management should monitor its work force compensation,
professional fees, and higher sales/marketing costs (Annual
Report, WMI, 2007). They should also evaluate the path their
strategic initiatives are taking to ensure they are creating
value.
While Waste Management’s returns on assets and equity are
less than Republic Services’, they are higher than the industry
average of 3.0% and 13.9% respectively (MSN Money, 2008). The
company needs to improve the way it utilizes its assets to
generate revenue. There could be obsolete assets, or assets that
are not operating efficiently in there inventory. These assets
should be evaluated for possible disposal.
Liquidity Ratios
These ratios measure the amount of liquidity that a company
has to cover its short-term debt obligations. In general, the
greater coverage of liquid assets to short-term liabilities, the
better the signal that a company can pay its short term debt
obligations and still fund its ongoing operations (Business
Ratios, 2008).
Waste Management Company Analysis 83
Current Ratio
The current ratio (also called the working capital ratio)
measures the company’s ability to generate cash to meet short-
term obligations (less than 12 months). It is determined by
dividing the current assets by the current liabilities. A decline
in this ratio can be attributed to an increase in short-term
debt, a decrease in current assets, or a combination of both
(Business Ratios, 2008).
Waste Management’s ratio fell slightly in 2007, due to a
reduction of current assets by $702 million in the area of cash,
cash equivalents, and other current assets (Morningstar, 2008).
Waste Management’s current ratio of .95 means that for every
dollar of debt they have $.95 cents of assets (Business Ratios,
2008). Allied Waste saw its ratio fall from .68 to .52, due to a
$714.4 million increase in current liabilities, mainly in the
area of short-term debt and accrued liabilities (Morningstar,
2008). Republic Services had a slight increase in its current
ratio due to an increase of its current assets by $20.4 million
in the area of other current assets (Morningstar, 2008).
Table 31 reflects the current ratio values for each company.
Table 31
Current Ratio
Current Ratio 2004 2005 2006 2007
Waste Management Company Analysis 84
Waste Management 0.88 1.06 0.97 0.95Allied Waste 0.53 0.58 0.68 0.52Republic Services
1.11 0.72 0.65 0.66
Data: www.morningstar.com
Quick Ratio
The quick ratio, also known as the acid test, serves a
function that is similar to that of the current ratio. The
difference is that the quick ratio subtracts inventory from
current assets and compares the resulting figure to current
liabilities. This calculation includes only cash on hand or cash
already due from accounts receivable (Business Ratios, 2008).
In 2007 WMI increased its quick ratio to 0.86, which means
that Waste Management has $0.86 of quick assets for every $1 of
current liabilities. These quick assets are considered easily
transferable into cash. Allied Waste reported a drop in its quick
ratio to 0.41. Republic Services also had a drop in its quick
ratio to 0.51. Table 32 reflects the quick ratio of each company.
Table 32
Quick Ratio
Quick Ratio 2004 2005 2006 2007Waste Management 0.75 0.82 0.76 0.86Allied Waste 0.42 0.47 0.52 0.41
Waste Management Company Analysis 85
Republic Services
0.92 0.62 0.54 0.51
Data: www.morningstar.com
Recommendations for Improvement
In Table 33 Waste Management is the leader in both the
current and quick ratios. However, the company’s ratio values are
less than the industry averages of 1.1 and 1.0 respectively (MSN
Money, 2008).
Table 33
Company Rank – Liquidity Ratios
Highest Middle Lowest Current Ratio WMI - 0.95 RSG - 0.66 AW - 0.52 Quick Ratio WMI - 0.86 RSG - 0.51 AW - 0.41Data: www.morningstar.com
To improve these ratios Waste Management can pay off current
liabilities or current bills, delay purchases, or consider long-
term loans to repay short-term debt. Waste Management could also
decrease its’ account receivable turnover by reducing the time it
takes to collect receivables (Business Ratios, 2008).
Leverage Ratios (Debt Management)
These ratios measure the extent to which the companies use
debt financing. The ratios discussed in this section are the debt
Waste Management Company Analysis 86
ratio, the debt to equity ratio, interest coverage, and short-
term debt ratio.
Debt Ratio (Debt-to-Assets) and Debt to Equity
The debt ratio measures the percentage of a company’s assets
that are financed by creditors. It is calculated by taking the
total debt and dividing it by the total assets. A higher ratio
indicates a possible overuse of leverage, so a lower ratio is
preferred (Business Ratios, 2008).
The debt to equity ratio indicates the degree of financial
debt or leverage that a company is using to enhance its return.
The formula is total debt divided by owners’ equity. It is
preferred that companies have a falling trend because this
indicates they have greater equity and less debt (Business
Ratios, 2008).
In 2007, Waste Management’s debt ratio increased 1.5% and
its debt to equity increased 0.18 as a result of a $513 million
increase in long-term debt and decreases of $493 million in
short-term debt (Annual Report, WMI, 2007). Allied Waste improved
its debt ratio by 1.6% and debt to equity ratio 0.38. This was
primarily due to a $167.6 million reduction in total debt
(Morningstar, 2008). Republic Services’ debt to assets increased
3% and its debt to equity increased 0.11 as a result of
additional long-term liabilities of $169 million in 2007
(Morningstar, 2008). Table 34 reflects the debt ratio (total debt
Waste Management Company Analysis 87
to total assets), and Table 35 shows the debt to equity of all
three companies.
Table 34
Debt Ratio
Debt Ratio 2004 2005 2006 2007Waste Management
71.4% 71.0% 69.8% 71.3%
Allied Waste 80.0% 75.7% 73.8% 72.2%Republic Services
58.3% 65.4% 67.8% 70.8%
Data: www.morningstar.com
Table 35
Debt Ratio and Debt to Equity Ratio
Debt to Equity 2004 2005 2006 2007Waste Management
1.37 1.33 1.20 1.38
Allied Waste 3.56 2.97 2.21 1.83Republic Services
0.72 0.92 1.09 1.20
Data: www.morningstar.com
Interest Coverage
Interest coverage is also known as “times interest earned
ratio.” The formula is operating income divided by the interest
expense. This is a measure of how many times your interest
obligations are covered by earnings from operations. If this
ratio is declining over time, it is a clear indication that your
financial risk is increasing (Business Ratios, 2008). A higher
ratio indicates increased solvency. For 2007 all of the companies
improved on their interest coverage.
Waste Management Company Analysis 88
Waste Management improved its interest coverage as a result
of increased operating income of $225 million and a $24 million
reduction in interest expense (Annual Report, WMI, 2007). Allied
Waste improved its interest coverage due to increased operating
income of $88.3 million, while reducing its interest expense by
$25 million (Annual Report, AW, 2007). Republic Services improved
its interest coverage from increasing its operating income 16.5
million and lowering its interest expense by $1 million (Annual
Report, RSG, 2007). Table 36 shows the interest coverage for all
companies for 2004 through 2007.
Table 36
Times Interest Earned
Times Interest Earned
2004 2005 2006 2007
Waste Management 3.73x 3.45x 3.72x 4.32xAllied Waste 1.16X 1.56X 1.7X 1.96XRepublic Services 6.59X 7.02X 6.85X 7.89XData: www.wastemanagement.com , www.awin.com ,
www.republicservices.com
Short-Term Debt Ratio
Short-Term Debt is a ratio of short-term debt to total
liability and equity. Short term debt is payable within 12 months
(Business Ratios, 2008).
Waste Management decreased its short-term debt ratio 2.4%,
primarily a result of reducing its short-term debt by $493
million. Allied Waste increased its short-term debt ratio due to
Waste Management Company Analysis 89
a $320.7 million increase in short-term debt obligations
(Morningstar, 2008). Republic Services short-term debt ratio
remained below 1%. Table 37 reflects the short-term debt ratio
for each company.
Table 37
Short-Term Debt
Short-Term Debt 2004 2005 2006 2007Waste Management 1.80% 2.50% 4.00% 1.60%Allied Waste 2.40% 1.80% 1.70% 4.00%Republic Services
0.10% 0.10% 0.10% 0.10%
Data: www.morningstar.com
Recommendations for Improvement
Table 38 summarizes the company positions for all of the
leverage ratios.
Table 38
Company Rank Leverage Ratios
Highest Middle Lowest Debt Ratio AW - 72.2% WMI -
71.3%RSG - 70.8%
Debt to Equity AW – 1.83 WMI – 1.38 RSG - 1.20
Interest Coverage RSG - 7.89x WMI - 4.32x
AW - 1.96x
Short-Term Debt AW - 4.00% WMI - 1.60%
RSG - .10%
Data: www.morningstar.com
Waste Management can improve its leverage ratios by decreasing
its debt. In 2007, Waste Management increased its long-term debt
by $513 million. This increase is part of Waste Management’s
strategy to grow and support their business (Annual Report, WMI,
Waste Management Company Analysis 90
2007). Waste Management needs to find other ways to finance
operations, if it wishes to improve the leverage ratio.
Waste Management’s debt/equity is at 1.38, which means it
has $1.38 of long term debt to each dollar of shareholder equity.
To improve its debt to equity ratio, it needs to continue to use
its free cash flow to pay off debt. The interest coverage can be
improved by decreasing debt, and securing lower interest rates on
long term obligations.
During 2007 Waste Management took steps to pay down its
short-term debt, decreasing it by $493 million (Annual Report,
WMI, 2007). They need to continue this trend of paying off short-
term debt, but need to evaluate how they are doing this. If they
are borrowing long-term funds to do this, then they are not
helping their total leverage position.
Turnover Ratios (Asset Management Ratios)
The asset management ratios measure how effectively the firm
is managing its assets. In this section three ratios are
discussed: receivables turnover, fixed assets turnover, and total
assets turnover.
Receivables Turnover Ratio
The accounts receivable turnover ratio measures the
effectiveness of the company’s credit policy. It is determined by
dividing the revenue by the average accounts receivable. If the
Waste Management Company Analysis 91
turnover is too low, it may indicate the company is being too
generous granting credit or is having difficulty collecting from
its customers. A high receivable turnover ratio is wanted,
because money is flowing into the company faster (Morningstar,
2008).
For 2007, Waste Management’s accounts receivable, net of the
allowance for doubtful accounts of $97 million, was $1,674. This
is an increase of $24 million over 2006 (Annual Report, WMI,
2007). Both Allied Waste and Republic Services had no change in
their receivables turnover ratio. Table 39 reflects the
receivable turnover for each company.
Table 39
Receivables Turnover
Receivables Turnover
2004 2005 2006 2007
Waste Management 6.7 6.6 7.2 7.1
Allied Waste 8.1 8.4 8.7 8.7
Republic Services
10.5 10.4 10.7 10.7
Data: www.morningstar.com
Fixed Assets Turnover Ratio
The fixed assets turnover measures how effective the firm
uses its plant and equipment to generate sales. It is determined
by dividing the revenue by the value of the fixed assets.
Waste Management Company Analysis 92
Generally it is desirable to have a higher ratio, because it
indicates that more money is being earned per dollar of fixed
assets. If the ratio is high, it is a good indicator the assets
of the company are being used efficiently and effectively. A
declining ratio may indicate excess investments in plant,
machinery and equipment, or other fixed assets (Business Ratios,
2008). It could also indicate the firm is not operating at the
minimum efficient scale. In Table 40 you can observe that
Waste Management and Allied Waste were unchanged from 2006 to
2007, but Republic Services had a slight increase.
Table 40
Fixed Assets Turnover
Fixed Assets Turnover
2004 2005 2006 2007
Waste Management 1.1 1.2 1.2 1.2
Allied Waste 1.3 1.4 1.4 1.4Republic Service 1.4 1.4 1.4 1.5Data: www.morningstar.com
Total Assets Turnover Ratio
The total assets turnover ratio measures the turnover of all
the firm’s assets and indicates how well a firm is using all of
its assets to generate revenue (Business Ratios, 2008; Stock
Information, 2008). The ratio is determined by dividing revenue
by total assets. It is desired to have a higher ratio (Business
Ratios, 2008).
Waste Management Company Analysis 93
Due to rounding in Table 25 it appears that Waste Management
had a slight improvement of its ratio, while both Allied Waste
and Republic Services were unchanged. In actuality if you
calculate these figures out to four places, you can observe that
each of these companies had a slight increase in this ratio for
2007. These changes were due to small increases in both assets
and revenue for Republic and Allied Waste. Waste Management’s
increase was actually reflective of less revenue and assets
during 2007. Table 41 summarizes the total assets turnover for
each company.
Table 41
Total Assets Turnover
Total Assets Turnover
2004 2005 2006 2007
Waste Management 0.6 0.6 0.6 0.7
Allied Waste 0.4 0.4 0.4 0.4
Republic Services
0.6 0.6 0.7 0.7
Data: www.morningstar.com
Recommendations for Improvement
Table 42 summarizes the company positions for all turnover
ratios.
Table 42
Company Rank Turnover Ratios
Company Rank - Turnover Ratios -
Waste Management Company Analysis 94
2007 Receivables RSG – 10.7 AW - 8.7 WMI – 7.1
Fixed Assets RSG - 1.5 AW - 1.4 WMI - 1.2
Total Assets WMI - 0.7 RSG - 0.7 AW - 0.4
Data: www.morningstar.com
To improve its receivables, Waste Management could take the
following actions: increase collection efforts, reduce credit
terms, shorten the billing process, reduce billing errors, and
train its credit and collections personnel in proper collection
procedures.
To improve its fixed and total assets Waste Management
should continue to focus on the superior maintenance program it
has recently implemented. This will help keep new purchases at a
minimum. In addition, leasing should be pursued as an alternative
to equipment purchasing. All purchases should show an expected
increase in profitability before closing any deal (Business
Ratios, 2008).
Solvency Ratios
Solvency ratios are measures to assess a company’s ability
to meet its long-term obligations and remain solvent. Two
general, overall solvency ratios are presented below.
Solvency Ratio
Waste Management Company Analysis 95
The general solvency ratio is determined by taking the
company’s total assets divided by the total liabilities. All of
the companies have more assets than liabilities using this ratio
(Business Ratios, 2008).
Waste Management’s solvency ratio fell in 2007. The primary
reason for this was total assets decreased by $425 million due to
lower current assets (Morningstar, 2008). Allied Waste raised its
solvency ratio by increasing its total assets by $137.7 million
and through reducing its total liabilities $167.6 million
(Morningstar, 2008). Republic Services increased their total
assets by $38.4 million in 2007 but still fell in solvency. The
total liabilities for Republic Services increased $156.7 million,
primarily due to long-term debt liabilities (Morningstar, 2008).
In Table 43 the solvency ratios for each company are presented.
Table 43
Solvency Ratio
Solvency Ratio 2004 2005 2006 2007
Waste Management 1.39 1.41 1.43 1.40
Allied Waste 1.24 1.34 1.35 1.39
Republic Services
1.72 1.54 1.47 1.41
Data: www.wastemanagement.com , www.awin.com ,
www.republicservices.com
Operating Cash Flow Ratio
Waste Management Company Analysis 96
The operating cash flow ratio measures how well current
liabilities are covered by the cash flow generated from a
company’s operations. The OCF Ratio is determined by dividing the
cash flow from operations by the current liabilities. It is
desired to have a rising operating cash flow ratio (Business
Ratios, 2008).
Waste Management increased its operating cash flow ratio as
a result of reducing its current liabilities, short-term debt, by
$493 million. Allied Waste had a falling operating cash flow
ratio, as a result of increased accrued current liabilities in
the amount of $394.1 million (Morningstar, 2008). Republic
Services increased their operating cash flow during 2007,
primarily from a reduction in the area of federal income taxes
payable (Annual Report, RSG, 2007). Table 44 shows the operating
cash flow ratios for each company.
Table 44
Operating Cash Flow Ratio
Operating Cash Flow Ratio
2004 2005 2006 2007
Waste Management 0.69 0.73 0.78 0.94
Allied Waste 0.37 0.45 0.60 0.47
Republic Services 1.49 1.15 0.86 1.05Data: www.morningstar.com
Recommendations for Improvement
Waste Management Company Analysis 97
Table 45 ranks the company positions for all of the solvency
ratios.
Table 45
Company Rank – Solvency Ratios
Highest Middle Lowest Solvency Ratio RSG -
1.41WMI - 1.40 AW - 1.39
Operating Cash Flow RSG - 1.05
WMI - 0.94 AW - 0.47
Data: www.morningstar.com
To improve its solvency ratios, Waste Management should
increase the value of its assets, decrease liabilities, and
improve operating cash flow. This is achieved through managing
fixed costs, reducing variable costs, increasing revenue inflows,
and growing revenue through pricing and market expansion
(Business Ratios, 2008).
In the waste industry, pricing is very competitive and there
is the propensity for losing customers to competitors in
overlapping territories. Waste Management introduced individual
customer pricing in 2003 and is in-place across all operating
groups (Annual Report, WMI, 2005).
Waste Management is mostly concerned with reducing its
variable costs. Through its truck routing system, “Fleet Route”,
it has improved route density and eliminated redundant truck
routes. In addition, Waste Management uses a fleet maintenance
system that automates shop functions and track repairs. In 2007
Waste Management Company Analysis 98
the company realized a savings of $74 million from its risk
management component. This was the result of Waste Management’s
continued focus on safety.
Financial Analysis Summary
In summary, various financial ratios have been presented for
Waste Management and its two competitors. In each section, the
ratios and their values were given followed by recommendations to
improve each ratio. In addition, a ranking table for 2007 values
showed the position of Waste Management in comparison with Allied
Waste and Republic Services.
Waste Management’s strengths lie in the following ratios and
figures: revenue, gross and net income, total assets turnover,
earnings per share, price per earnings, price per book, and the
liquidity ratios. Waste Management is in the middle with net
profit margin, operating profit margin, return on assets, return
on equity, price per sale, and price per cash flow. It ranks last
among its competitors in accounts receivable turnover, fixed
asset turnover, operating profit, and gross profit margin.
The company experienced a decrease in revenue of $53 million
in 2007, or 0.4%. This was primarily due to volume declines in
the economic slowdown of residential and commercial building and
price competition. Waste Management’s revenue growth for 2007 was
primarily a result of increased yield on the base business from
pricing. In addition steps were taken to try and control company
Waste Management Company Analysis 99
variable costs. These variable costs include: maintenance and
repair, labor, fuel, subcontractor costs, transfer and disposal
costs, and risk management costs. Waste Management is growing its
net income through its efforts to improve operating efficiency
and get rid of unprofitable segments.
One of the financial challenges for Waste Management is
finding sources of growth from its current market and in seeking
revenue growth from new markets. It is their current goal to
explore the opportunity of acquisitions to assist them in their
growth goals (Annual Report, WMI, 2007). In order to improve
their financial situation, it is going to be imperative that they
carefully evaluate all expenditures, and look for ways to
strengthen and expand their market share.
Waste Management currently has the largest market share, yet
they are behind their two competitors on operating profit, gross
profit, receivable turnover, and fixed asset turnover. Correcting
the efficiencies in operating and gross profit is very much
reliant on revenue generation and cost reductions. In fact,
Allied Waste has even started streamlining their operations to
reduce costs.
Waste Management is well on their way to developing
significant cost savings and revenue generation. They have
implemented a better maintenance and repair system, a tailored
pricing system, safety improvements, routing evaluations, and a
Waste Management Company Analysis 100
restructuring effort for their organization and management
structure. However, they are going to have to do more. An
impending merger between Allied Waste and Republic Services will
bring Waste Management’s two biggest competitors up to their
market share and resource level.
Waste Management needs to start looking at possible
acquisition targets that will strengthen the core business and
possibly give them an edge over the competition. They will need
to continue their focus on energy generation and recycling. This
will include working closely with governmental authorities to
choose locations where the company will benefit most by expanding
into. They will need to continue there research in alternative
fuel sources, but in the meantime, the company needs to evaluate
the possibility of route changes. This might include a different
time to pick-up garbage containers in high traffic, urban areas.
They need to explore alternative bin sizes for their industrial
clients. Research needs to be conducted on the possibility of
expanding the bin size to lengthen the time between pick-ups. The
cost of the bins would need to be evaluated against the savings
to see if this is a feasible alternative. Both of these would
reduce the amount of fuel being spent by the company. Labor cuts
could be another option, if the garbage trucks could be mainly
automated, so one person could run them. This again would need to
Waste Management Company Analysis 101
be evaluated against the additional costs and the potential cost
savings.
The company should also explore the possibility of finding
new customers to purchase the products of their recycling
operations. Revenue growth opportunities exist for Waste
Management in the recycling sector. Recycling services for 2007
increased revenue by $224 million. Waste Management could invest
in building new recycling facilities or expanding existing ones.
Currently Waste Management operates 99 recycling locations for
paper, glass, metal, and plastics are processed for resale. They
also have six secondary recycling locations that sell the
recycled material as raw material for manufacturing and consumer
use. Waste Management also recycles rubber, electronics, and
commodities (Annual Report, WMI, 2007). With stricter regulations
being enacted recycling is a strong growth opportunity for Waste
Management.
To improve in accounts receivable turnover, the firm needs
to evaluate their current pricing policies. Changes might include
discounts for those that pay early, or changing to a pay-up-front
method for problem accounts. The aging of accounts receivable
would need to be evaluated to determine what type of credit terms
the firm is offering. It may be fixed by just a simple change in
the credit policies of the firm.
Waste Management Company Analysis 102
For fixed asset turnover improvements the firm needs to
evaluate the age and condition of their current fixed assets. It
could be that these assets are not running at optimal speed and
need to be replaced or disposed of. It could also be that the
firm has assets that are not earning the firm money and that
could be disposed of. This would be something the firm needs to
look into immediately. It may be that they are overpaying for the
assets and could get a cheaper price somewhere else. These are
all considerations the firm must take into account when
evaluating ways to improve this ratio.
While Waste Management has the largest market share, that
does not guarantee them a larger profit. They must continually
improve and respond to the actions in the market. This includes
staying on top of regulatory and competitive changes. If the
company will continue their initiatives to improve services,
decrease costs, and gain market share they can remain
competitive.
Revenue and Sales
During the 2007 operating year, Waste Management had sales
of $13.31 billion (Waste Management, 2007). The public sector,
including franchises and municipal contracts provided for $3.6
billion of this amount. Waste Management breaks their revenue
recognition into the different market segments they serve. Based
on the 2007 gross revenue, revenue earnings can be allocated
Waste Management Company Analysis 103
between the following segments: Wheelabrator, 6%; WMRA & Other,
8%; Eastern Group, 21%; Midwest Group, 19%; Southern Group 23%;
and the Western Group 23% (Waste Management, 2007).
Company Growth
The waste industry is experiencing flat volume and weak
pricing (Hoover’s, 2008). This is in large part due to the
weakening construction industry. Construction waste can impact
waste volume by as much as 15% to 20%. However, other trends in
the industry itself, such as recycling and energy generation
efforts help to offset this for Waste Management Incorporated.
Sustainable growth goals discussed in October 2007, by CEO
David Steiner, include goals aimed at sustaining the company from
now until 2020. These goals include: the doubling of waste-based
energy production, increase he volume of recyclable material
processed, investment in cleaner technologies, and the
preservation of additional wildlife habitat across North America
(Waste Management, 2007). These strategies are aimed at
leveraging the company’s core business strengths and taking
advantage of their expertise in organic growth (Waste Management,
2007).
During the 2006 operating year revenue growth was a modest
2.2%, and was mainly composed of price hikes. During 2007 revenue
growth was 3.3%, attributable to more price hikes and efficiency
boosting programs such as, operating unit consolidation, staff
Waste Management Company Analysis 104
reduction, and a new fleet maintenance system (Waste Management
Value Line, 2008). However, even these cost initiatives did not
offset the impact of declining volumes and company divestments
during 2007. It is projected by Value Line that in 2008 Waste
Management will increase service fees by 2.5% to 3.0% over 2007.
Standard and Poor’s projects that during the 2008 operating year
there will be low single-digit organic growth stemming from such
prices hikes as these. This should help the company average close
to 10% earnings growth over 2008 (Standard & Poor’s, 2007).
Is this growth picture good enough? Declining volumes in the
waste industry are forcing firms to cut costs and raise prices.
There are also high start-up costs to contend with in the
industry. For new firms considering market entrance, the growth
rate is probably not enough to entice them to enter given the
high costs and moderate-to-low growth rate. Existing firms will
continue to promote cost savings initiatives and pass costs to
customers. This will generate low organic growth for the firm
temporarily. Waste Management Incorporated’s management recognize
the need to continue efforts on lowering operating, general, and
administrative costs, with standardized processes and
productivity improvements (Waste Management, 2007). The goal for
Waste Management will be to keep customers by remaining the lower
priced competitor.
Waste Management Company Analysis 105
While growth may not be as high as a few years prior, there
are still growth opportunities for Waste Management. These
include growth opportunities and their recycling, waste-to-
energy, and gas-to-energy operations. The company is positioned
well to pull through the slow growth period, as long as it
continues its’ focus on innovative projects and controls costs.
Profit Margins
Waste Management had a net profit margin in 2007 of 8.74%.
In Table 46 you can see the net profit margin for the years 2004
through 2007. You will observe that profit margins have remained
relatively flat for Waste Management. There were declines in net
profit from 2005 to 2006 of .81%, and an increase in 2007 over
2006 profits of .15%. Observing the top competitors of Waste
Management, you will notice the same trend, with relatively flat
profit changes in from 2004-2007 for Republic. Allied Waste seems
to be the only one with wide swings in net profit.
Table 46
Net Profit Margin
2004 2005 2006 2007
Waste Management 7.50% 9.04% 8.59% 8.74%
Allied Waste 0.92% 3.55% 2.67% 5.11%
Republic Services 8.78% 8.86% 9.10% 9.13%
Waste Management Company Analysis 106
In related areas net profits of Stericycle, a medical waste
disposal company, show a different trend. In 2004 they had net
profits of 15.1%, in 2005 it was 15.3%, in 2006 it was 13.6%, and
in 2007 it was 13.9% (Stericycle, 2008). In the hazardous waste
segment, Clean Harbors profit ratios were as follows: in 2004
1.1%, in 2005 3.6%, in 2006 6.3%, and a decline in 2007 to 4.7%
(Clean Harbors, 2008). In the building industry, which largely
affects waste volumes, there have been significant declines in
net profit margins during the 2006 and 2007 operating years.
There trends were rising during 2004 and 2005, only to plummet
during the housing bubble bust in 2006. For example, Champion
builders had net profit margins of 3.3% during 2005, but only .6%
in 2007 (Champion Builders International, 2008). In the net
profit comparison figure, Figure 22, you can see the relative
changes between net profit for Waste Management and the other
industries discussed previously.
Waste Management Company Analysis 107
Figure 22
Return on Assets and Velocity
The return of assets ratio, gives an indication as to how
effective a company is using its’ assets to generate earnings.
For 2007, Waste management had a return on assets of 5.7%, as
calculated using 2007 financial statements. This was up from the
2006 number by .19%. They have been steadily improving each year.
In 2004 they only achieved a return of 4.52% and in 2005 they had
moved up to a 5.62% return (Waste Management Annual Report,
2007).
Inventory Turnover was 81.3 and asset turnover was .7% for
2007 (Hoover’s, 2008). The total asset turnover ratio measures
how much in sales revenue is generated per dollar of assets. The
company’s turnover ratio of .70, denotes that for every 1.42
dollars in assets they can generate one dollar worth of sales
Waste Management Company Analysis 108
(Morningstar WMI, 2008). The inventory turnover ratio can help
the firm identify how efficiently inventory quantities are being
managed. Low turnover can mean the company is carrying obsolete
inventories or that the company is carrying too much or too
little inventory. These figures are important to the inventory
costs of carrying too much inventory, or the cost of running out
of inventory (Wiley, 2008).
Cash Assets
For Waste Management, Value Line lists cash assets as $666
million in 2005, $614 million in 2006, and $348 million in 2007.
The most logical explanation for these decreases is the continued
focus of Waste Management on paying off existing debt. Since the
market they participate in is entering the mature stage, they are
focusing on paying off existing debts that may have been from
start-up or incremental improvement costs. This can be seen in
the same Value Line report, by examining the debt due. The debt
due was $522 million in 2005, $822 million in 2006, and $329
million in 2007(Waste Management Value Line, 2008).
Cash Flow
Cash flow results shows whether the cash generated from
operations is enough to cover investing. If it is then the
company has a healthy flow of cash. If not, then the company may
have to finance their operations by selling stock (Money Chimp,
nd).
Waste Management Company Analysis 109
Net operating cash flow has been increasing each year from
2003 until 2006. There was a slight decrease in 2007 cash flows
of $101 million (Hoover’s, 2008). These changes are in large part
due to the economic downturn and declining volumes of waste.
Waste Management is combating these issues by reducing operating
costs and increasing their service fees. They have also started
to reduce their overseas operations and administrative staff
(Waste Management Value Line, 2008). Items that significantly
affected their cash flows from 2006 to 2007 were as follows:
changes in tax benefit recognition under SFAS No. 123(R);
operating income improvements, net of depreciation of $150
million, a reduction during 2007 of risk management liabilities
by $80 million, increased bonus payments, increased payments for
liabilities, and more trade receivables than in 2005. Net cash
flows for Republic Services and Allied Waste have been improving,
with Republic having a slight dip between 2005 and 2006. The dip
in Republic’s cash flow between 2005 and 2006 was due, in large
part, to an $83 million tax deferral for the 2005 operating year
based on the IRS’ response to Hurricane Katrina. The net
operating cash flow can be observed in Table 47.
Table 47
Net Operating Cash Flow
Waste Management Company Analysis 110
2004 2005 2006 2007WMI 2,218.0 2,391.0 2,540.0 2,439.0Allied 650.4 716.6 921.6 1,057.0Republic 666.3 767.5 522.1 661.3
For Waste Management their net financing cash outflow has
increased (Hoover’s, 2008). The numbers that affect the financing
aspect include the repurchase of 40 million shares of stock
during 2007, at cost of $1.4 billion. They also paid out $495
million of cash dividends in 2007 compared to $476 million in
2006 (Waste Management Annual Report, 2007). In Table 48 the net
financing cash flow is shown for Waste Management, Republic, and
Allied Waste. Republic actually decreased their cash outflow
between 2006 and 2007. Allied Waste increased their cash outflow
significantly between 2006 and 2007. Data for the prior years are
also provided to show trends prior to the current year.
Table 48
Net Financing Cash Flow (millions)
2004 2005 2006 2007WMI (1,130.0) (1,090.0) (1,803.0) (1,946.0)Allied (489.2) (45.5) (274.8) (334.8)Republic (437.3) (480.0) (409.4) (408.3)
Net investing over the past year has decreased from 2006
numbers for all three competitors, except Republic. For Waste
Management their net investing cash flow has decreased over the
past year from $788 million in 2006 to $761 million in 2007
Waste Management Company Analysis 111
(Hoover’s, 2008). Allied’s investment fell from $609 million in
2006 to $585 million in 2007 (Hoover’s, 2008). In Table 49 the
net investing cash flows of all three competitors over the past
four years has been presented so you can observe the different
company trends. Decreases are most likely the result of continual
cost savings initiatives during the lower growth period.
Table 49
Net Investing Cash Flow (millions)
2004 2005 2006 2007WMI (863.0) (1,062.0) (788.0) (761.0)Allied (537.9) (683.0) (608.8) (585.4)Republic (206.7) (297.2) (215.4) (260.3)
Competitive Analysis
From figures presented in the financial section, it is easy
to see that Waste Management does dominate the market. They do
have this advantage over competitors. They also have a larger
share of revenues because of this. However, they often rank in
between their competitors on financial indicators. It is clear
that they seem to be quite stagnant, due to the fact that they
are so large. However with merger talks, it is clear that Allied
Waste and Republic Services may be gaining ground quickly. It
will be up to Waste Management to respond quickly to their need
for improvements and how to maintain their market share. One tool
Waste Management Company Analysis 112
that can help management analyze the current conditions within
the market and organization is a SWOT analysis.
SWOT Analysis
Now after looking at the company structure and key financial
measurements a SWOT analysis can be conducted. The purpose of
this analysis is to provide managers an understanding of the
forces that impact company. Once these forces have been
effectively identified managers can come up with plans to
strategically combat these forces.
Strengths
Technology
Waste Management has current technologies utilizing waste-
to-energy and gas-to-energy processes. Out of the top three
competitors: Allied, Waste Management, and Republic Services,
Waste Management is the only one with this technology know-how.
Strategies
Strategies already focused on utilizing alternative energy
sources to fuel delivery trucks. Other strategies by Waste
Management focus on expanding the waste-to-energy and gas-to-
energy plants.
Global Position
Waste Management Company Analysis 113
Waste Management has operations in the United States, Puerto
Rico, and Canada. Only allied has operations in another country,
Puerto Rico.
Market Share
Waste Management serves nearly 20 million customers (Waste
Management, 2007). They therefore have a larger market share than
Allied Waste or Republic services.
Marketing
Waste Management’s continued focus on the environment gives
them an advantage over Allied Waste or Republic Services. Waste
Management focuses on displaying an environmentally friendly
image. They have the “think green” slogan on the side of their
trucks and the use of their old landfills for protected wildlife
habitats (Waste Management, 2007). They also focus on the
creation of green energy, currently producing 450 megawatts of
green energy from their methane gas collection programs. Through
their recycling programs they recycle over 3.5 million tons of
paper and cardboard; more than 25,000 tons of aluminum; and
processed more than 214,000 tons of metals in 2007 thereby
reducing greenhouse gas emissions (Waste Management, 2007).
Products/Services
Waste Management has waste-to-energy and gas-to-electricity
capabilities that other competitors do not possess.
Licenses/Permits
Waste Management Company Analysis 114
Waste Management Incorporated has more government permits
for solid waste landfills than its’ three closest rivals combines
(Leckey, 2007).
Assets
Landfills
Waste Management owns 277 active landfill sights, more than
any of their competitors (Waste Management, 2007). Even if
Republic and Allied Waste combine, Waste Management will still
own 49 more landfills.
Transfer Stations
Waste Management currently operates 341 transfer stations
(Waste Management, 2007). Given the long distances to some of the
landfills, the use of transfer stations makes it more economical
for the company. The transfer stations can compact the waste and
then transport it to the landfill or waste-to-energy facility.
Allied Waste only has 164 transfer stations (Allied Waste, 2007).
Republic Services only has 93 transfer stations (Republic
Services, 2007).
Trucking Fleets
Waste Management Incorporated has one of the largest
trucking fleets in collection services (Hoover’s, 2008).
Weaknesses
Waste Management Company Analysis 115
Leadership
Waste Management has a centralized structure. Under
corporate management, there are six operating groups, of which
four are organized by geographic area and two are organized by
function. With a centralized management structure it makes it
hard for them to respond to rapid changes in the competitive
environment. It also affects the amount of innovation in the
company. Innovation most readily occurs in decentralized
operations.
Financial Measures and Returns
While some of Waste Management’s financial ratios are good,
in most cases their competition is still better. For return on
equity and assets Waste Management tends to fall in between its’
two competitors. You can see this trend in the following
information. In Table 50, return on assets is depicted. Observe
that Waste Management’s return is 5.70%, Allied Waste is 1.97%,
and republic is 6.52%. In Table 51 the return on equity is
detailed for the past four years. For Return on equity Waste
Management is 19.36%, Allied Waste is 8.63%, and Republic
Services is 21.29%.
In Table 52 profitability ratios are present for each firm
in ranking order. Waste Management tends to earn more revenue,
but has a lower gross profit margin that its’ competitors. In the
net profit region they also lie in between Allied Waste and
Waste Management Company Analysis 116
Republic Services. This leads to the point that Waste Management
has some room for improvement on these figures.
Table 50
Return on Assets
Return on Assets
2004 2005 2006 2007
Waste Management
4.52% 5.62% 5.51% 5.70%
Allied Waste 0.36% 1.50% 1.17% 1.97%Republic Services
5.28% 5.63% 6.23% 6.52%
Data: www.morningstar.com
Table 51
Return on Equity
Return on Equity 2004 2005 2006 2007Waste Management 16.28% 19.55% 18.62% 19.36%Allied Waste 2.21% 8.50% 5.80% 8.63%Republic Services
12.60% 14.59% 18.47% 21.29%
Data: www.morningstar.com
Table 52
Company Rank – Profitability Ratios
Company Rank Highest Middle LowestGross Profit Margin AW - 37.6% RSG -
37.1%WMI - 36.8%
Operating Profit Margin
AW - 17.4% WMI - 16.9%
RSG - 16.9%
Net Profit Margin RSG - 9.13% WMI - 8.74%
AW – 4.51%
Data: www.morningstar.com
Size
Waste Management Company Analysis 117
Given Waste Management’s large size they will have to be
careful not to underestimate their competition. With Republic and
Allied Waste talking mergers, Waste Management will have to
carefully watch their strategic planning and be able to react
quickly to competitor’s moves. In large companies this is
sometimes difficult to do.
Dealing With Strengths and Weaknesses
Waste Management has a major strength in their market share,
asset quantity, technological know-how, and environmentally
friendly operations. They can utilize these three aspects to gain
first mover advantage by continually improving and developing
these assets.
In the energy generation area, Waste Management already as
an advantage over Allied Waste and Republic Service. They already
have the technological know-how, and have already started to
build the processing facilities to support this type of future
technology. Waste Management can use these capabilities to
continue to expand in this market. By utilizing the increasing
demand for power, they can gain first mover advantage over Allied
Waste and Republic. The same is true for their utilization of
gas-to-energy resources. While, Allied is also experimenting in
this arena, Waste Management has more landfills to utilize in
this area.
Waste Management Company Analysis 118
Given their market share, it will be hard for other operating
companies to match their ability to service so many parts of the
industry. They operate in every state except two (Waste
Management, 2007). They also operate in Canada and Puerto Rico.
This gives them an advantage over the firms only operating in
domestic markets. They do have to consider that Allied Waste is
presently competing with them in Puerto Rico, also. By
continually expanding their customer base they can maintain and
grow in market share. Of course this is subject to controlling
costs and meeting customer needs as well.
Waste Management can also leverage their increasing image to
be environmentally friendly to draw in more environmentally
conscious consumers and expand on their environmental product
offerings. This strength has many added benefits. It will benefit
the company in the long-run as regulations increase on the trash
disposal and landfill space becomes more-and-more limited. There
is also a large amount of profit potential. They are essentially
taking something given to them and processing it into a revenue
generating product (Waste Management, 2007).
Waste Management has one of the largest asset bases for
landfills, transfer stations, and trucks (Waste Management,
2007). With such a large asset base they have the capabilities of
servicing more customers than their competitors. These assets can
also be leveraged to generate the company more money by finding
Waste Management Company Analysis 119
ways to effectively use them to their fullest potential.
Consequently, this is one of the areas Waste Management needs to
focus on improving. However, it is clear that if they can improve
their return on these assets they have the resources to
outperform their competition.
In dealing with weaknesses, Waste Management should
continually look for ways to create a culture that fosters
innovation. This could include the decentralization of
management. With decentralization, this will give the local
branches the opportunity to react quickly to competitor moves and
customer needs of their specific regions.
Concerning financial measures there will need to be a
continued effort in improving the net, operating, and gross
profits by further implementation of cost saving programs. Waste
Management has already started to do this by getting rid of
unprofitable customers, reducing administrative positions, and
with improved safety standards for employees (Waste Management,
2007). It is vital to overcome their financial weaknesses that
they focus on utilizing their assets better. This could include
the evaluation of assets to determine if they are obsolete or if
the costs of retaining the asset outweigh the benefits, or profit
generation. These steps would help to improve their return on
assets and could free-up valuable cash to be invested elsewhere.
Waste Management Company Analysis 120
While, Waste Management has better ratios than their two
competitors, they do lie slightly below the industry average.
To overcome their low quick and current ratios they could
evaluate their credit policy and evaluate the current assets.
This might include issuing discounts to those that pay in a
shorter time period. It might also include the evaluation of
inventory. How, much inventory is the firm holding and is it cost
effective to hold this level. They should evaluate whether the
money invested in inventory could be better invested elsewhere.
The final weakness is Waste Management’s large size. Even
though their size is attributable to their many locations, which
is beneficial in growth opportunities, it can be their downfall.
Waste Management needs to take steps to continue innovation and
customer retention, especially with the merger of Allied Waste
and Republic Services. If they underestimate the power of their
competitors this could be to their detriment. They will also need
to continue to improve relations with governmental agencies that
have the power to revoke any operating licenses.
Opportunities
Renewable Energy Sources
Investment in renewable energy production is one of the
largest opportunities for Waste Management Incorporated. This
particular segment of their industry has very attractive growth
potential. Demand for renewable energy is growing very rapidly.
Waste Management Company Analysis 121
Right now renewable energy sources only make up around 7% of the
U.S. electricity supply (Waste Management, Inc. SWOT Analysis,
2007). Increases in regulation and the demand for more clean
sources of energy are a big opportunity for Waste Management to
gain a strategic position at the head of this market.
Recycling Programs and Gas Energy
There is also the continued attractiveness of increased
utilization of recycling programs and the landfill gas to energy
projects. During 2007, seven landfill gas-to-energy projects were
operational. Given their expertise in that area they have the
opportunity to leverage this knowledge to benefit third parties
(Waste Management, 2007).
Threats
Political and Governmental
Due to the amount of governmental regulation within the
waste management industry, the threat of increasing regulatory
acts is prominent. These regulatory actions are likely to get
more and more stringent as time progresses. This can add to
increased costs of operations, and regulatory permits. Also,
recent regulation changes in construction debris disposal in
landfills can affect the company. The regulations limit the type
of materials, from construction, that can be disposed of in
landfills. This can increase the costs of the firm in finding
Waste Management Company Analysis 122
alternative disposal methods (Waste Management, Inc. SWOT
Analysis, 2007).
Legal Forces
Significant threats exist regarding lawsuits from
environmental violations given the form of business. As of
December 31, 2007 four lawsuits have been filed against Waste
Management and its’ subsidiaries for such violations. The
allegations are that Waste Management and its’ subsidiaries
failed to comply with proper storage requirements for leachate at
their landfill locations. They also violated federal air
regulations at one of their landfills, failed to meet reporting
requirements, and violated National Pollutant Discharge permits
conditions at a landfill. They believe that these charges will
amount to $100,000 or more (Waste Management Annual Reports,
2007).
Economic Conditions and Complementors
Due to the recent economic downturn waste volumes are
declining. According to the IMF world economy outlook, the real
GDP growth of the U.S. is expected to slowdown in 2008. It is
estimated that GDP will only grow 1.1% in 2008, down from the
3.3% the industry saw in 2006 (Waste Management, Inc. SWOT
Analysis, 2007). This leads to less revenue without cost
increases. With cost increases comes the potential loss of
customers to competitors who may have lower prices. It is
Waste Management Company Analysis 123
imperative for Waste Management to control cost in order to
offset the amount of cost increases passed on to customers.
Recent declines in complementing industries, such as the
building industry, also have a negative impact on waste volumes.
It is estimated that 15% to 30% of waste volumes are generated by
the construction industry.
Waste minimization strategies are also a threat to the
company. With increases in the costs of treating waste and
disposing of waste, companies look for other alternatives to
reduce waste. Industries start to adopt cleaner technologies and
put cheaper, pollution prevention equipment in place. In the
hazardous waste segment, which Waste Management also competes, is
currently seeing the implementation of waste minimization through
reuse and recycling programs.
Competition
With the likely merger of Republic Services and Allied
Waste, Waste Management will encounter a bigger competitor than
they have recently dealt with. Their competition will now have
the combined resources to issue a substantial threat to Waste
Management’s market position. The company must also contend with
high competition from municipalities and regional government
authorities. These competitors have the advantage of subsidies,
giving them a competitive advantage over private firms.
Waste Management Company Analysis 124
Management of Opportunities and Threats
In order to take advantage of opportunities within the
market Waste Management will need to continue their focus on
energy generation. This will come in the form of increasing the
waste-to-energy production facilities and continual improvement
in waste-to-energy processes. Money should be allocated to
research and development in order to stay ahead of other
competitors and look for continuing alternatives for waste
disposal. Waste Management will also need to continue to improve
and focus on recycling programs to support the more
environmentally friendly customers and look at expansionary
opportunities. There is also the opportunity to better utilize
existing resources to generate increases in revenue.
As for threats, minimization of the impact of government
regulations will be hard to control. Of course there is always
lobbying, but there is not guarantee. The best way to minimize
this threat is to stay ahead of the changing regulations by
continuous improvement of disposal processes. This should
generate more efficiency for the firm, increased revenues, and
less problems with more stringent regulations.
In dealing with the economic downturn and municipal
competition, the firm will need to continue to focus on cost
effective programs. These programs will allow the firm to reduce
costs and continue revenue generation, with small increases to
Waste Management Company Analysis 125
the customer. It may be beneficial to look at the market segments
the firm is currently servicing, and explore opportunities in
unexploited market niches. The main focus should be on cost
reduction and customer retention.
Table 53
Strategy/SWOT Matrix Worksheet
Waste Management, Inc. Strengths - S Weaknesses – WSO Strategies
Use strengths to take advantage of opportunities
1
2
3
4
WTE Operations
Gas-to-Energy Operations
GlobalOperationsIn Puerto Rico & Canada
29% Market Share
1
2
3
4
Centralized Management Structure Mid-range returns for Return on assets 5.70%
Large Size
Return on equity midrange 19.36%
WO Strategies
Overcome weaknesses by taking advantage of opportunities
ST Strategies
Use strengths to avoid threats
Waste Management Company Analysis 126
5
6
7
Environmental Programs
Large asset base, with 277 Active landfills and 314 Transfer Stations
Largest trucking fleet in waste collection
5
6
7
Midrange operating and net profit margins. 16.9% and 8.74% respectively
Lowest gross profit margin of 36.8%
Lower Quick ratio .86 and current ratio of when compared with industry average. However they are higher than their top 2 competitors.
WT Strategies
Minimize weaknesses and avoid threats
Opportunities – O
SO Strategies WO Strategies
1
2
3
4
Renewable Energy Resources
Recycling Programs and expansion
Creation of an expanded global presence
Utilize closed landfills for revenue resources.
1
2
3
Continue to expand WTE sites (S1,S2,O1)
Develop recycling program awareness (S5,O2)
Evaluate and Pursue expansion opportunities within the national boarders of their global market (S3,S6, O3)
1
2
3
Increase returns by expanding the growing Waste-to-energy and Gas-to-energy markets (W2,W4,W5,W6,O1)
Decentralize decisions in the global operations(W1, W2,O3)
Expand the sale of recycled materials
Waste Management Company Analysis 127
4(W2,W5,W6,O2)
Evaluate alternative revenue generation techniques for existing assets (W2,W4,O4)
Threats - T ST Strategies WT Strategies1
2
3
4
5
Government regulations
GDP of only 1%
Fuel Price Increases
Merger talks between Allied and Republic
Impending legal claims for environmental violations
1
2
3
Continue to develop WTE and environmentally friendly processes (S1, S1,S5,O1)
Consider the possibility of acquiring Republic (S6,T4)
1
2
3
4
Development more processes to supply electricity (T2,W2)
Increase operating efficiency programs and close unprofitable locations (T2, T3,W3)
Decentralize Management so locations can react to environmental changes (T4,W1)
Implement operating procedures to minimize risk of environmental violations(T5,W1)
Waste Management Company Analysis 128
Business Definition
Evolution of the industry
In the future, the waste management industry will continue
to move toward more renewable products and services. In 1991 the
EPA erected very high barriers to entry into the disposal
landfill market by enacting the Subtitle D regulations. The
permitting process involves the investment of $25 to $100 million
just to seek an operating permit, and the process could take up
to ten years or more to complete. This effectively limits the
number of waste landfills in the United States. As an answer to
the future limited landfill space, governments, waste companies,
product companies, and consumers will have to devise alternatives
to the current model of waste production and waste disposal (MSW
Management, 2001).
Waste Management will need to continue their focus on
environmentally friendly practices and maintain there compliance
with governmental permit regulations. They will need to continue
their acquirement of new competencies in environmental disposal
and recycling programs, to minimize their impact on the
environment. They will also continue to make customer service
process improvements and change to meet the needs of the growing
customer segments.
Waste Management Company Analysis 129
The Future of Waste Management: New Products/Services
As the leader in waste collection, Waste Management will
have to expand its presence in waste-based energy production. To
accomplish this Waste Management will have to expand their
partnerships with governments, to develop new waste-to-energy
plants and gas-to-energy (landfill gas) projects.
In addition, it is anticipated that Waste Management will
need to significantly increase its capacity to process recyclable
materials. While Waste Management has instituted a single stream
process that has increased capacity for local recycling programs,
it is obvious that more recycling plants will be needed in the
future. Waste Management will also need to implement research and
development to explore the possibility recycling other materials.
It may be that they can expand the list of items that can be
recycled and reused successfully. This would significantly
increase the amount of products Waste Management can provide and
increase the life of their landfills.
Finally, for Waste Management to remain successful it will
need to continue its relentless efforts in the area of cost
reduction. Waste Management should continue to expand its use of
natural gas in their fleet trucks. The company is already
expecting to invest up to $500 million per year, over the next
Waste Management Company Analysis 130
ten years to increase the fuel efficiency and emission of their
fleet by 15% (Waste Management Annual Report, 2007).
Future Customers
Waste Management should continue to keep its current base of
customers and operating segments. Waste Management’s current
revenue segments include collection, landfill, transfer,
recycling, and waste-to-energy. They will still focus on
municipalities, industrial, commercial, and residential
customers. It is anticipated that Waste Management will move
further into the areas of recycling, and waste-to-energy as
America moves toward a goal of zero waste. This could lead to a
slight increase in commercial or industrial customers seeking
more environmentally friendly solutions. Further growth and
revenue increases, in the collection segment, will come from
identifying those markets that will provide higher profit
margins, and from acquisitions and/or mergers. There is also the
possibility that Waste Management could see an increase in its
landfill revenue, as tipping fees will likely increase as other
company’s landfills fill to capacity.
Major Competitors
The waste management industry is made up primarily of three
companies; Waste Management Inc., Allied Waste Industries, and
Republic Services. Waste Management has the largest market share
at 29%, followed by Allied Waste at 13%, and Republic Services
Waste Management Company Analysis 131
has a 7% share of the industry market. This can be seen in Figure
23.
Figure 23
Allied Waste Industries, Inc. (AW)
Allied Waste Industries, Inc. operates as a non-hazardous
solid waste management company in the United States and Puerto
Rico. The company provides collection, transfer, recycling, and
disposal services for residential, commercial, and industrial
customers. Allied Waste Industries is currently the number two
waste management company and is headquartered in Phoenix, Arizona
(www.finance.yahoo.com/q?s=AW).
Republic Services, Inc. (RSG)
Republic Services, Inc. provides non-hazardous solid waste
collection and disposal services for commercial, industrial,
Industry Market Share
29%
13%
7%
51%
WMIAWRSGOthers
Waste Management Company Analysis 132
municipal, and residential customers in the United States. It is
currently ranked as the number three waste management company in
the United States. Republic Services, Inc. was founded in 1996
and is headquartered in Fort Lauderdale, Florida.
(www.finance.yahoo.com/q?s/RSG)
Possible Merger and Acquisitions
In June 2008 Republic Services made a bid to purchase Allied
Waste for approximately $6.07 billion to which Allied Waste
accepted the offer, pending shareholder and regulatory approval.
In response, on July 14, 2008, Waste Management made a $6.2
billion offer for Republic Services. This offer was a 22% premium
over Republic Services’ closing price on Friday, July 11, 2008.
On July 18, 2008, Republic Services decided not to enter merger
negotiations with Waste Management, because management decided
that the proposal would not result in a more favorable
transaction for its shareholders than the merger with Allied
Waste (SmartMoney, 2008). Republic Services and Allied Waste are
moving their merger plans forward by hiring Deloitte Consulting,
LLP to advise them in their merger integration planning (Houston,
2008).On July 24, 2008, Waste Management announced that it will
seek to buy shares of Republic Services (Yahoo!, 2008). This
merger has a tremendous effect on the competitors in the future.
If these two firms merge their assets will be combined to provide
an equivalent size opponent to Waste Management. We feel that
Waste Management Company Analysis 133
these opponents, along with firms that pursue environmentally
friendly strategies, will be our major competitors.
Objectives
Revenue/Sales
Waste Management will generate average annual sales growth
of 2.5% for the next 4 years.
Justification
Waste Management will see a revenue increase 2.5% per year
primarily from its pricing initiatives as well as higher
recycling commodity pricing. It will see a decrease in
collections for 2008 due to volume declines primarily resulting
from economic slowdowns in the residential and commercial
building industries. Revenue from the collection line of business
is anticipated to increase in years 2009 through 2011 due to
price increases (Annual Report, WMI, 2007).
Recycling commodity pricing will continue to rise
approximately 10% per year, contributing $578 million over the
four year period.
Waste Management Company Analysis 134
Table 54
Projected Revenue/Sales
Projected Revenue/Sales 2007 2008 2009 2010 2011 Collection 8,714 8,656 9,002 9,097 9,187 Landfill 3,047 2,986 2,976 2,988 3,010 Transfer 1,654 1,620 1,596 1,616 1,635 Wheelabrator 868 878 887 896 900 Recycling and other 1,298 1,428 1,542 1,711 1,876 Intercompany -2,271 -1,926 -1,989 -1,975 -1917 Total 13,310 13,642 14,014 14,333 14,691
Net Income
Waste Management will generate average annual net income
growth of 2.5% for the next four years.
Justification
Waste Management will continue to increase its net income
due to increases in revenue from its recycling operation and from
steady collection and landfill fees. Although collection revenue
will be modest, Waste Management has the capability to increase
its landfill tipping fees from local haulers. Driving the
increase in net income will be management insistence on decreases
in its operating expenses, primarily fuel expenses through the
continued efforts to change its fleet from diesel to natural gas,
as well as lowering its work-related injuries through its zero
accident campaign (Annual Report, WMI, 2007).
Waste Management Company Analysis 135
Table 55
Projected Net Income
Projected Net Income 2007 2008 2009 2010 20111,163 1,192 1,221 1,252 1,283
Market Share
Waste Management will expand its market share by 3% over the
next four years.
Justification
Gains in market share in this industry have traditionally
been the result of consolidation, mergers, and acquisitions.
However, as the leader in renewable waste-based energy production
and recyclable materials, Waste Management stands to increase its
current market share of 29%.
Waste Management must increase its volume of recyclable
materials through the development of new recycling plants,
acquiring existing companies that own recycling facilities, or
expanding the capabilities at its existing facilities.
Waste Management has recently made a bid to buy Republic
Services, but the bid was refused by RSG. Waste Management has
made it clear that it intends to buy shares of Republic Services
in the future. This will no doubt bring an anti-trust issue in to
play that will have to be addressed.
Waste Management Company Analysis 136
Waste Management will increase its total market share by
investing in alternative energy sources, including both landfill
gas-to-energy and waste-to-energy combustors.
Alternatives
As the industry leader, Waste Management Inc. has the
financial resources and human capital, to explore alternative
means of growth that stretch their current operations. Trends in
the industry are moving toward an increased focus on
environmentally friendly operations. As government regulations
continue to increase, the industry is continually moving toward
more environmentally friendly operations and processes. Consumers
are more aware of the environment and are demanding energy
resources that do the least amount of harm to the environment.
Waste Management can use this to their advantage in a number of
different ways, which will not only allow them to increase market
share, net income, and revenues, but it will also improve their
image among society.
In the idea generation process for alternatives, the core
competencies, existing assets, and future of the industry were
all considered. Waste Management already has an enormous asset
base, from which to draw upon for alternatives. We feel the
merger of Allied Waste and Republic will force Waste Management
to look at acquisitions, in order to gain market share in the
waste disposal segment. However, should they choose, we feel they
Waste Management Company Analysis 137
can venture into the following alternatives to grow their
presence in other markets and support their current market
presence.
The three alternatives that we generated include: 1. Enter
the building industry using their own recycled products. 2.
Invest in solar panels to run their garbage disposal plants and
facilities. 3. Place windmills on closed landfills to produce
energy to sell to consumers. These alternatives are unique in
that they could all be used simultaneously with existing assets,
if Waste Management found the alternative to be profitable.
Given the current trend of consumers placing a great amount
of weight on being environmentally responsible, these
alternatives could help them achieve their objectives to increase
market share by 3%, net income by 2.5%, and revenues by 2.5%,
over the next four years. Although Waste Management is feeling
increased pressure from the competition, including a merger
between the number two and three companies, we feel that Waste
Management can still achieve these objectives. Devoting research
and development efforts to these alternatives, right away, will
allow Waste Management to be successful in its endeavors to
"think outside the box", and provide a unique way to outpace the
competition.
Waste Management Company Analysis 138
Building Materials
The first alternative Waste Management can explore to
achieve these objectives, is to venture into the building
industry using recycled products such as plastic, glass, and
aluminum as components of building materials. They would be the
first-mover, among Waste Management companies, to venture into
this operation. This would give them an edge over competitors who
enter later. Waste Management already promotes environmentally
friendly practices and procedures; and this would only further
improve their image with customers, as well as give them a source
of diversification to increase net income and revenues.
There are two paths that Waste Management could explore
under this option. The first is generating the recycled materials
to sell or utilizing the materials to enter the building market.
In the home building industry, Waste Management will be able to
compete, not by being the best home builder necessarily, but by
being the most environmentally conscious home builder. Waste
Management can maintain a low cost basis because all of its
building materials will be "donated" in the form of waste. This
gives them a major competitive advantage over other home
builders, as they compete for market share in this emerging
industry. Selling houses gives Waste Management a tangent to
explore that is away from their normal operations, but is still
aided by their normal activities of recycling. Ensuring that
Waste Management Company Analysis 139
these houses are built quickly and efficiently, as well as making
them energy star certified should make this alternative a
successful way to boost sales (Balogh, nd.).
The other path is to simply sell the products on the open
market to home builders. While this is more in line with Waste
Management’s current operations, this is a viable backup, should
the building industry be unattractive.
This strategy is unlike any strategy the competitors have.
This alternative will enable Waste Management to grow market
share in other industries, increase the revenues brought in, and
increase net income through the use of existing assets.
Solar Panels
Another alternative for Waste Management to consider is to
invest in solar panels to run their garbage disposal plants. If
Waste Management could find a way to run their plants full-time
using only the power of the sun, they would not only become an
icon in their industry, but they would be globally recognized.
Again, this option would increase revenues by adding sales of
those consumers that are the most worried about the health of the
environment. This will also increase the firms’ net profit, by
creating reduced costs for utilities. This alternative could also
generate growth, by drawing in customers who are concerned with
the environmental impacts of firms.
Other alternatives using solar panels include the conversion
Waste Management Company Analysis 140
of Waste Managements fleet to run off of solar power. When taking
into account all the costs that are incurred by Waste Management
companies, the use of gasoline and diesel hurts their bottom line
more than anything else. A company that is spending most of its
earnings to fuel its operations cannot be successful in adding
explosive growth to its net income. Using the energy of the sun
is free to any company that can successfully harness it, and
would be worth the short-term expenditure to invest in these
solar panels. As fuel prices constantly rise, Waste Management
companies will all be looking for a solution that will enable
them to operate at a cost low enough to turn a profit. Waste
Management can generate higher returns if the process can be
perfected for their fleet. Their competitors will literally burn
their profit up as gas prices rise. These alternatives are also
unique for the company because no other waste management company
has explored the use of alternative energy sources to operate
their fleet.
Windmill Energy Generation
Keeping the same theme of alternative energy and
environmentally friendliness, the third option Waste Management
should look into is placing windmills on their closed landfills,
in order to create electricity. Not only could Waste Management
use the electricity to help operate its own plants, but Waste
Management could actually venture into selling this energy as any
Waste Management Company Analysis 141
power company would. The windmills could be made of recycled
material and the wind certainly would be a free resource that
Waste Management would never run out of.
Windmills are just starting up as a viable means of creating
electricity and the time to create windmill farms is now. In
order to maintain as well as create brand awareness, Waste
Management would still operate this section of its business under
the Waste Management brand name. This would give Waste Management
a chance to increase revenues and net income by not only making
money off of materials exiting the home, but now they would be
able to sale a service that goes into the home as well. This
essentially gives Waste Management the opportunity to create
"two-in-one" customers as both waste and power services would be
available to all households (The Sustainable Resource Guide,
2007).
Alternative Pros & Cons
Building Materials
Of course the positive aspects of this alternative are the
potential to increase revenues, net income, and market share,
while prolonging the life of landfill assets. This alternative
opens-up a largely untapped revenue base for the company. The
negatives include economic downturns in the building industry and
the potential of the process to require more asset acquirement to
produce the products.
Waste Management Company Analysis 142
Solar Panels
The positive aspects of this alternative are the increased
cost savings to the company and potential acquirement of
environmentally focused customers. The negatives come down to the
costs involved in acquiring and setting up the plant to use the
panels. There could also be significant research and development
costs to create the technology to convert the fleet over to solar
power.
Windmill Energy Generation
The positive aspects of this alternative are the increased
costs savings, new revenue potential, and increase in net income.
The negative aspects include the costs involved with acquiring
the assets to harness and transport the energy.
In summary, these alternatives would be relatively unique to
Waste Management. They would provide them with increased
opportunities to cut costs, increase revenues, increase market
share, and increase net income. The alternatives would provide
Waste Management with entry into a relatively untapped market.
These alternatives have the potential to bring about a dynamic
change for Waste Management. However, they also have some
drawbacks that need to be taken into consideration. The
exploration into these alternatives will largely be in uncharted
territories, in which Waste Management has never ventured before.
It will bring about the addition of differing kinds of employees,
Waste Management Company Analysis 143
added costs, and the risk of failure. If one of the alternatives
were to fail, Waste Management could more than likely continue
operations with no visible problems, but if two or all three were
to fail, the consequences could be disastrous. However, the
opportunity to outpace the competition is worth taking the chance
of having to deal with the cons that go along with these
alternatives.
Recommendations
In order to achieve Waste Management’s objectives, we
recommend that Waste Management tries a mixture of all three
alternatives, as opposed to using only one. One positive factor
about the alternatives is that they can stand on their own or
they can be used together to make even more of an impact. Each
alternative would affect the objectives in their own way, but
when the right mixture of each is used, the objectives become
much more realistic to achieve.
In deciding to utilize all of these alternatives, we
evaluated the current and future industry environment. Pricing
and cost efficiency are two major factors in the industry
currently. All of these alternatives utilize, to a large extent,
assets Waste Management already owns. These alternatives also
have the possibility of creating costs efficiencies for the
company. They are also very cognizant of industry trends toward
environmental consciousness.
Waste Management Company Analysis 144
If Waste Management explored each alternative, they would
first and foremost create an image of one that is socially
responsible. This would set the stage for an increase in net
income, revenues, and market share. Building houses and selling
power would increase revenues, as well as net income, and
investing in solar panels would lower costs, further creating a
surge in net income. Together, all of these would steal market
share and further solidify Waste Management’s position as the
industry leader. It is possible that they could also ward off
threats, like the merger of major competitors, if they were to
capture even more market share through these alternatives.
In addition, over the next five years there will only be
further pressure to pursue environmentally friendly operations.
Those companies that are perceived to efficiently achieve these
goals will be the ones who earn customer loyalty and have the
potential to open up new markets. Each of these alternatives
serves as a way to improve the image of Waste Management over
other companies in the industry. This aspect by itself will
contribute a great deal to achieving the objectives set forth
over the next five years.
Implementation Considerations
Waste Management Company Analysis 145
There are also several factors that Waste Management must
take into consideration when trying to implement a mix of these
three alternatives. Most of the issues that would arise from
implementing these alternatives would be similar, because they
are all pointed relatively in the same direction. Observing a
few different aspects and challenges that may arise during
implementation of these alternatives will allow Waste Management
to better understand the most effective ways to venture into
these new projects.
Setting Unreasonable Expectations
The first pitfall that must be avoided when implementing new
alternatives is to avoid setting your goals and expectations too
high. We believe the objectives of 3% growth in market share, and
2.5% in net income, as well as revenues over four years is not
only feasible, but it is well in line with our alternatives. By
not making its expectations unreasonable, Waste Management can
focus on steady growth and taking the time to make the correct
decisions, in order to implement these alternatives effectively.
Setting the bar too high when experimenting with new alternatives
will only serve to lower employee morale by being too demanding,
losing revenues by not working efficiently, and essentially
losing market share because so much time, effort, and money is
tied up in the alternative.
Elastic Business Definition
Waste Management Company Analysis 146
One aspect of demand for these new alternative's outputs is
that it will be relatively elastic. That is, as the price goes up
for these new services, the demand will tend to go down. Waste
Management must realize that although people are concerned about
the environment, they will be unwilling to pay unreasonable
amounts regardless of the environmental impact. It will be a
necessity that Waste Management is able to be profitable from
these alternatives without raising prices so much that customers
will be unwilling to do business with them.
Creation of a Cause, Not a Business
Becoming a company that is constantly aware of its
environmental impact does not need to take priority over making a
profit. The bottom line is that companies are in business to turn
a profit in order to sustain growth and satisfy shareholders.
Waste Management must be careful with using these alternatives
only as a cause to better the environment, and they must insure
that these alternatives are viable business options as well.
Waste Management must not get caught up in simply operating for
the environment's sake, but they must also focus these
alternatives as ways to make ever-increasing profits.
New Voices
Waste Management Company Analysis 147
When attempting to implement these alternatives, Waste
Management’s management must encourage input from its employees
on ways to successfully adopt these new experiments. According to
Gary Hamel, there are three places that Waste Management should
look, in order to hear the most innovative ideas that could help
Waste Management make a smooth and profitable transition into
these alternatives. Waste Management should look to its younger
employees or anyone with a youthful outlook; employees near the
geographic areas, because they usually have fewer resources and
are move creative; and newcomers who offer a fresh new
perspective on the situation. Encouraging input from all these
sources will profit Waste Management by allowing it to gain
insight from a diverse group with fresh, new ideas (United Bit,
2000).
Open Market for Capital and Talent
When initially trying to implement these new projects, Waste
Management must not limit their own opportunities by deciding to
spend only a certain amount on these alternatives. If Waste
Management is serious about being an innovative leader, they must
make the necessary sacrifices in order to push through any
difficulties and give these alternatives every chance to succeed.
Also, these new projects are going to require some of the most
knowledgeable, intelligent human capital that Waste Management
can find. The company must create an atmosphere that will not
Waste Management Company Analysis 148
only attract top talent, but also one that will maintain this
talent. In order to do this, Waste Management must create a work
environment that promotes experimentation and innovation, while
also compensating their employees at a level as good as or better
than the employee could find elsewhere.
Low Risk Experimentation
By trying to implement a mixture of all three of these
alternatives, Waste Management gives itself a cushion when it
comes to the risk involved in each. If one alternative is clearly
not going to work, Waste Management can abandon this operation
and focus even more of its efforts onto the other two. These
alternatives certainly won't be accomplished without taking on
some risk, but Waste Management has established enough financing
that a loss wouldn't be totally crippling to its operations. The
main aspect of risk that Waste Management’s management must keep
in mind is that the realization of when one of the alternatives
isn’t going to work out, and be willing to put a stop to it
before too much money is lost.
Cellular Division
The last aspect of implementation that Waste Management must
take into consideration when looking at these alternatives is
cellular division. Right now, Waste Management has mainly focused
on its core competency, and has yet to stretch itself out in
order to experiment with alternatives that are "outside the box."
Waste Management Company Analysis 149
These alternatives give Waste Management a chance to
differentiate and diversify its business operations. Instead of
becoming a stagnant company, these alternatives will yield
results not only with net income, revenues, and market share, but
they will also promote a company-wide attitude of growth and
innovation. (United Bit, 2000)
In summary Waste Management should carefully evaluate each
alternative for viability and strategic possibilities. They
should keep a close watch on market trends and respond
accordingly, in order to maintain and increase market share. They
should decide on the course of action that will help them meet
their growth, revenue, and net income objectives, as well as
provide the firm with long-term profitability.
References
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