WM is an attractive investment due to its low valuation relative to historical levels and strong earnings growth prospects.

The waste management company's stock has fallen by 5% over the past year, and by approximately 5.3% since the beginning of the year. This is an exceptional decline, as the company has only experienced one year of decline since 2012, and that was in 2022, when its stock fell by approximately 3.6%

Therefore, the past 13, 14 or 15 years have been exceptional for the waste management company . So, yes, that's a significant decrease. In contrast, the Standard & Poor's 500 index performed well over the past year, rising by approximately 16%

What is striking is that if we look at last month’s performance, we find that the Standard & Poor’s 500 index has risen slightly, but this is not typical market performance.

The waste management company is an industrial company, and therein lies the paradox. We note a decline in the industrial sector of approximately 5.6% during the past month.

Does the decline in the stock of the waste management company represent an investment opportunity, or is it just a price increase like many other industrial sectors? What we are discussing here is the five-year price-to-earnings ratio for a waste management company.

Historically, this company has always traded at a price higher than its market value, and this is due to several reasons that we will discuss later.

We note that the five-year price-to-earnings ratio is approximately 27.6. Currently, it stands at around 24.3, which is very close to its lowest rating level in the past five years But what is interesting is that the price-to-earnings ratio is unstable.

The price-to-cash-flow multiple is completely different. The company is at its lowest valuation level in the past five years when viewed from the perspective of the free cash flow multiplier.

In fact, the average over the past five years is 32.7, while currently it is only 21.08. Therefore, we see that investors are willing to pay a lower valuation multiple for the waste management company at the moment.

Actually, this is quite interesting. It's a completely different story from what we've just seen in the industrial sector as a whole. The waste management company operates in a completely different way from the rest of the sector.

So why this difference? Does this represent an opportunity for the waste management company ?

Let's enter the WM data here. The data will be uploaded, and Waste Management's current yield is approximately 1.76%. It is certainly a higher return than the S&P 500, but it is by no means a high return . This is a defensive stock with dividend growth.

Over the past five years , they have performed exceptionally well in increasing their dividend payouts, with a compound annual growth rate approaching 10%. They currently use less than half of their free cash flow to distribute dividends.

Herein lies one of the features that I like and greatly appreciate about this stock : the growth of their dividends is almost in proportion to the growth of their free cash flows, which means that the dividend growth is perfectly sustainable, whether we look at it on a five-year or ten-year basis.

This means that the distribution of free cash flows will generally remain within a similar range. Of course, they have a long history of increasing dividend payouts over time. So, we began to form an idea of the type of stock we were talking about.

You will notice very stable internal cash flows into the company. Revenues have been very stable, and growth since around 2020 has been very strong. The compound annual growth rate of revenues over five years was approximately 10.6%.

Therefore, consecutive years of dividend growth with stable cash flows and stable revenues give us a clearer picture of this company. First, one of the most important points I would like to emphasize is that this company has stable, growing and recurring revenue streams.

These are, in brief, the advantages of investing in a waste management company in general.

In fact, one of the points they also mentioned was the generation of predictable cash flows . Let's see what exactly they mean. If we start scrolling down, we'll find things get interesting.

The cash flows of the waste management company are characterized by their considerable resistance to economic downturns . It's easy to understand what they mean here; they are providing customers and communities with a basic service.

This is one of the few services that did not stop operating in 2020.

Perhaps the most attractive thing is that it has recurring revenues, which is truly impressive . 75% of its revenues have characteristics similar to fixed income. Therefore, it quickly becomes clear why investors have historically been willing to pay a premium for this stock.

Why is it worth trading at a price between 30 and 35 times the cash flow multiple? Well , it is true that its profits and revenues were growing at a reasonable rate, perhaps around 10%, but the most important reason is the predictability of those cash flows.

I have mentioned this repeatedly, but at its core , a stock's valuation multiple is determined by two key factors: first, the rate of earnings growth, which is perhaps the most important, and second, the predictability of future cash flows.

As for the waste management company , most of its cash flows are recession-resistant and recurring. Investors buy this stock because of the predictability of its future cash flows.

In addition, we have seen very slight fluctuations in the share price itself, and this is a proven fact. Its beta coefficient was approximately 0.56 compared to the Standard & Poor's 500.

Therefore, it can be said that its volatility compared to the Standard & Poor's 500 is roughly half that of the Standard & Poor's 500.

I don't know about you, but based on everything you've mentioned , it seems like this is the kind of business Warren Buffett would have preferred to invest in at some point in his career .

Now, let's talk a little about capital allocation. Capital allocation is the most important management task, and I talk about this topic constantly for this very reason . It is literally the most important administrative task.

However, I have noticed that many people do not give this aspect of the work enough attention. But ultimately, we must ask: How do they allocate capital? Do they reinvest it in the company?

Are they conducting mergers and acquisitions to strengthen their balance sheet? Do they distribute profits to shareholders and repurchase their shares?

As for the waste management company , we note that it is relatively balanced, and this is what it states. The target free cash flow distribution ratio is around 40 to 50%, and above that, as we have seen, that is exactly what they did .

The current percentage is 47%. Over the past few years, the company has maintained its performance within a healthy range.

Therefore, as we mentioned earlier, dividend growth has been entirely in line with expectations and has been attractive over the past three, five and ten years. We are observing organic growth and a good rate of reinvestment.

The company has already undertaken some mergers and acquisitions, including the acquisition of Stericle, which has been of interest to us over the past few years. I have touched on this subject sufficiently in the past, but as you can see, it was a huge acquisition deal worth about $7.2 billion in 2024, and for comparison, the company generated free cash flow of about $2.1 billion that year.

Therefore, this deal was much larger than any free cash flow the company had generated in a single year.

It goes without saying that when making a deal of this size, it is important to achieve a positive return on investment.

We also note that a portion of the capital is allocated for share buybacks. They currently expect to repurchase shares worth approximately US$2 in 2026, and for comparison, they actually distributed approximately US$1.3 billion in dividends in 2025.

This gives us a clearer perspective. Share buybacks in 2026 will exceed the total dividends they distributed in 2025. So, it is indeed a stock that delivers real returns to shareholders.

Another interesting thing, in my opinion, regarding the waste management company, is the need to look at each stock from a perspective: How will artificial intelligence change this sector ? Will it pose a threat?

I think the simple argument for the waste management company is that artificial intelligence represents a measurable operational opportunity. It is clear that artificial intelligence cannot simply replace a waste management company overnight.

However, the waste management company is probably better positioned than any other company in its sector to actually implement artificial intelligence . Using artificial intelligence to improve every transport route, every truck, and every ton of waste.

This will reduce labor costs and improve waste collection routes.

This is not something that will take years. I think we will start to see this improvement in profit margins as well, which have been fairly good. We have observed a slight expansion over the past decade.

It is also important to note that they are currently undergoing a slight change, at least with regard to the CEO. The waste management company has appointed John Morris as its chief executive, as Jim Fish is set to retire after 25 years with the company.

Therefore, in any such internal change , it is worth noting that this change will not occur before January 4, 2027.

Now, after all of the above, let's delve a little deeper into the actual valuation of this stock. I mean, we know that compared to their historical performance, their stock price is trading at a discount.

Is this the new multiplier that the waste management company deserves, or is there a hidden investment opportunity?

Okay, let's take a few things into consideration , and we'll start by moving on to sensitivity analysis and entering data from the waste management company. Let's start by highlighting some important points.

To begin with , we note that by 2030, at least until that year, the projected compound annual growth rate of earnings per share will be around 9.6%, and this rate will rise to double digits by 2029.

Let's assume that the company will achieve 10% growth in earnings per share in the future, and that the current price-to-earnings ratio will remain at its current level, meaning that we will not see any increase in it .

The company's shares will continue to trade at their lowest levels in terms of free cash flow and earnings multiple over the past five years. What will that look like for the stock?

In this case, future returns look very attractive at current levels. We are talking here about compound returns ranging between 11% and 12 %, and even 13% in many cases, keeping in mind that this does not include the initial return of about 1.76 that you are supposed to receive at the same time.

What if the price-to-earnings ratio continues to decline? What if the market experiences a downturn? The stock is trading at a price-to-earnings ratio of 25. Fortunately, we expect earnings growth to be strong enough to deliver good returns until 2029 or 2031.

When you add dividends, we are talking about compound returns of between 8%, 9% and 10%.

Therefore, when looking at the waste management company from a risk-to-reward perspective, I believe the return has started to significantly outweigh the risk.

It is certain that this stock has historically traded at a price higher than its true value, and it is debatable whether this price is justified or not. However, the main risk, at least in previous years, of owning this stock was simply valuation risk.

The company is very strong, with recurring revenues, where fixed income makes up 75% of its total revenue. Given its expected cash flows, the main risk lies in the stock's valuation.

With earnings per share growing at a good rate over the past year, and its price declining at the same time, its valuation becomes more attractive. Therefore, even if the valuation multiple continues to trade within the current range, future returns look very attractive given the earnings growth forecasts.

In fact, the average target price currently set by analysts suggests the stock could rise by 25%, or approximately $260, from its fair value. Therefore, I am adding this stock to my investment portfolio, and I will be monitoring it closely and seriously considering adding more of it at the current levels.