U.S. markets close in 4 hours 21 minutes
  • S&P 500

    3,783.94
    +105.51 (+2.87%)
     
  • Dow 30

    30,247.99
    +757.10 (+2.57%)
     
  • Nasdaq

    11,170.90
    +355.47 (+3.29%)
     
  • Russell 2000

    1,770.98
    +62.11 (+3.63%)
     
  • Crude Oil

    86.47
    +2.84 (+3.40%)
     
  • Gold

    1,735.00
    +33.00 (+1.94%)
     
  • Silver

    21.23
    +0.64 (+3.11%)
     
  • EUR/USD

    0.9972
    +0.0145 (+1.48%)
     
  • 10-Yr Bond

    3.6210
    -0.0300 (-0.82%)
     
  • GBP/USD

    1.1438
    +0.0119 (+1.05%)
     
  • USD/JPY

    144.4400
    -0.1800 (-0.12%)
     
  • BTC-USD

    20,082.13
    +678.68 (+3.50%)
     
  • CMC Crypto 200

    455.57
    +10.13 (+2.27%)
     
  • FTSE 100

    7,087.10
    +178.34 (+2.58%)
     
  • Nikkei 225

    26,992.21
    +776.42 (+2.96%)
     

Estimating The Intrinsic Value Of Waste Management, Inc. (NYSE:WM)

·5 min read

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Waste Management, Inc. (NYSE:WM) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Waste Management

Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF ($, Millions)

US$2.44b

US$2.67b

US$2.88b

US$3.32b

US$3.57b

US$3.78b

US$3.96b

US$4.11b

US$4.24b

US$4.37b

Growth Rate Estimate Source

Analyst x11

Analyst x5

Analyst x1

Analyst x1

Est @ 7.58%

Est @ 5.89%

Est @ 4.71%

Est @ 3.88%

Est @ 3.3%

Est @ 2.89%

Present Value ($, Millions) Discounted @ 6.1%

US$2.3k

US$2.4k

US$2.4k

US$2.6k

US$2.7k

US$2.7k

US$2.6k

US$2.6k

US$2.5k

US$2.4k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$25b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 6.1%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$4.4b× (1 + 1.9%) ÷ (6.1%– 1.9%) = US$107b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$107b÷ ( 1 + 6.1%)10= US$60b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$85b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$169, the company appears about fair value at a 17% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Waste Management as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.1%, which is based on a levered beta of 0.977. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Waste Management, there are three pertinent elements you should consider:

  1. Risks: Every company has them, and we've spotted 1 warning sign for Waste Management you should know about.

  2. Future Earnings: How does WM's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here