Citi has added Waste Management (WMI) to its Top Picks Live List. Despite an upside surprise in Q2, the stock is down more than 10% from its recent high. Investors have been primarily concerned that WMI is going to overpay for a company called Republic Services (RSG). But Citi is not.
Despite RSG’s recent rejection of WMI’s $37/share offer, Citi is convinced WMI will not make a rash decision:
Waste Management’s restrained and prudent offer of $37 for RSG early last week, coupled with our conversations with both the company and a number of industry sources after Republic’s outright rejection, lead us to believe that this is NOT a “must have” deal for WMI, which could result in a bout of deal fever and a “drop dead” high price being offered as a result. As this becomes apparent, in our opinion, we believe investors can re-focus on sustained, robust industry and company fundamentals that were reaffirmed by management on road shows we hosted for both WMI and RSG recently.
Key catalysts for Citi:
- WMI should prove to be a beneficiary of lower oil, as the one-month lag factor of its fuel surcharge becomes a tailwind instead of a headwind (this cost $0.01-$0.02 in each of the first and second quarters.)
- conservative guidance
- strong cash flow
- purely domestic nature of the company (i.e. everyone else is screwed like the US, but on a lag)
Citi reiterates BUY on Waste Management (WMI) and adds WMI to Top Picks Live List, target $47.
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