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WEST HARTFORD — Waste Management Inc. will need more time to transform itself from a trash hauler to an environmental services company, an analyst said Monday as he downgraded shares of the Houston company.
Credit Suisse analyst Hamzah Mazari downgraded the nation's largest trash hauler to "Neutral" from "Outperform."
In a note to clients, he said Waste Management offers less attractive risk and reward compared with its peers and its capital allocation strategy "will likely take longer than the market expects to drive total shareowner return."
"Waste Management does not want to be a trash company but instead a one-stop 'green' environmental services shop and that transformation requires both a lot of patience and capital," he said.
In addition to removing trash from construction sites, homes and businesses, Waste Management recycles paper, metals and other materials and is seeking to increase its share of the medical waste industry.
Mazari said Waste Management's growth strategy will not likely lead to multiple expansion of its share value unless waste-to-energy and medical assets become a larger part of its portfolio. That would imply more free cash flow for acquisitions and less for share repurchases, he said.
Mazari cut his 2010 earnings estimate to $2.05 per share from $2.10 per share largely to account for reduced revenue at Waste Management's Wheelabrator Technologies business. Consensus for 2010 earnings is likely too high and does not include lower waste-to-energy earnings, he said.
Analysts surveyed by Thomson Reuters expect earnings to be $2.17 per share.
Waste Management has said it expects earnings to be cut by about 4 cents per share in the second half of 2009 due to continued weakness in energy prices at some Wheelabrator Technologies waste-to-energy plants. Wheelabrator plants convert municipal solid waste into electric power.
Shares gained 26 cents to close at $30.66 Monday.
