With the latest read on inflation suggesting an encouraging backdrop, acquiring shares of Waste Management (NYSE:WM) might seem overly cautious. However, good times or bad, the beauty of the underlying business is that it’s as good as cash. After all, someone must remove the rubbish that society inherently creates. Therefore, I am confidently bullish on WM stock.
WM Stock is Still Relevant Despite Good News
On the surface, investors seemingly have little to worry about regarding an upcoming recession. Although more than a few prominent voices have sounded the alarm – especially amid the U.S. regional banking crisis – subsequent economic data has demonstrated a surprisingly robust profile. Therefore, plying into a conservative trade like WM stock seems exceptionally and perhaps unreasonably pensive.
As TipRanks reporter Sheryl Sheth pointed out, the equities market ended the first half of this year with a bang. Primarily, key economic reports pointed to a possible disinflationary environment. First, the University of Michigan released its results on consumer inflation expectations over the next five years, which came in at 3%. While in line with expectations, this metric decreased compared to the prior month.
Secondly, core inflation (which excludes food and energy prices) increased by 0.3% in May, which is slightly lower than in April. Further, on an annual basis, the personal consumption expenditure (PCE) index increased by 3.8% compared to a lift of 4.4% in April. Therefore, with the pace of consumer price increases finally decelerating, sentiment for growth-oriented enterprises saw noticeable gains.
Under this backdrop, WM stock appears needlessly boring. Yes, the underlying enterprise is exceptionally relevant. However, with more viable opportunities available, sinking money into Waste Management seemingly incurs an opportunity cost. Nevertheless, the economy might not be as strong as it’s cracked up to be.
Rising Unemployment and High Debt Loads Make WM Attractive
As a company specializing in garbage removal and other environmental management services, Waste Management offers an indelible business no matter the market cycle. Also, the company commands a massive moat. With landfills running out of space, the industry focuses on stewardship, not necessarily competition. Such a moat offers an underappreciated advantage because rising unemployment and high debt loads belie the argument of rising economic resilience.
On the surface, a legitimate disinflationary environment should bode well for risk-on, growth investments. Throughout 2022, for instance, dramatic inflation forced the Federal Reserve to impose a hawkish monetary policy. In so doing, the sharp rise in borrowing costs killed expansionary endeavors. That’s why so many layoffs materialized in the growth-oriented technology sector.
However, a disinflationary economy suggests the Fed’s efforts to tame rising prices are working. Therefore, interest rate hikes may eventually become a thing of the past.
Unfortunately, though, the lift in the unemployment rate highlights the risk that too much disinflation could translate to job losses. On a large scale, the rise of both consumer and student debt puts many American households in a vulnerable situation should a recession become reality. Therefore, it’s important to consider a name like WM stock.
No, it’s not exciting, but it will help keep the lights on, irrespective of economic rumblings. That’s worth a premium in this environment.
Predictability in the Financials
Interestingly, WM stock currently trades at a forward multiple of 28.3. In contrast, the forward price-earnings ratio of the environmental and waste services sector is 33.75 times. Therefore, Waste Management even offers a discount. However, its main financial strength arguably centers on business predictability.
Notably, in Fiscal Year 2020, the company posted $15.22 billion in revenue, only a slight blip from the $15.46 billion posted in 2019. In many ways, this framework underscores the resiliency argument of WM stock. Since then, sales jumped to $17.93 billion in 2021 and $19.7 billion last year.
Most importantly for an enterprise such as Waste Management, its consistently profitable. Last year, the company posted net income of $2.24 billion, rising 23% over the prior year’s tally of $1.82 billion. In other words, you can trust WM stock to deliver the goods in good times or bad.
Is WM Stock a Buy, According to Analysts?
Turning to Wall Street, WM stock has a Moderate Buy consensus rating based on five Buys, six Holds, and zero Sell ratings. The average WM stock price target is $175.50, implying 2.4% upside potential.
Notably, on TipRanks, WM stock has a 9 out of 10 Smart Score rating. This indicates strong potential for the stock to outperform the broader market.
The Takeaway: WM Stock is Permanently Relevant
It might be that the bears are misreading the latest economic print and that the underlying fundamentals are indeed solid, but guess what? WM stock would still be relevant, especially because high-performing economies produce plenty of trash.
On the flip side, the bears could be interpreting the data accurately. In that case, WM stock would again be relevant because humans produce trash irrespective of economic cycles. With such a win-win profile, Waste Management stock looks attractive.
