Intrinsic value of Waste Management - WM

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$73.38

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$73.38

 
Intrinsic value

$33.12

 
Up/down potential

-55%

 
Rating

str. sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of WM stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 32.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  5.00
  6.60
  6.44
  6.30
  6.17
  6.05
  5.94
  5.85
  5.77
  5.69
  5.62
  5.56
  5.50
  5.45
  5.41
  5.37
  5.33
  5.30
  5.27
  5.24
  5.22
  5.19
  5.18
  5.16
  5.14
  5.13
  5.11
  5.10
  5.09
  5.08
  5.08
Revenue, $m
  13,609
  14,507
  15,441
  16,414
  17,426
  18,480
  19,579
  20,724
  21,919
  23,166
  24,468
  25,827
  27,249
  28,734
  30,288
  31,913
  33,614
  35,394
  37,258
  39,211
  41,256
  43,399
  45,645
  47,999
  50,467
  53,055
  55,768
  58,614
  61,600
  64,731
  68,017
Variable operating expenses, $m
 
  12,798
  13,582
  14,398
  15,248
  16,132
  17,054
  18,016
  19,019
  20,065
  21,158
  21,678
  22,871
  24,117
  25,421
  26,785
  28,213
  29,707
  31,272
  32,911
  34,627
  36,426
  38,311
  40,287
  42,359
  44,530
  46,808
  49,197
  51,703
  54,331
  57,088
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  11,317
  12,798
  13,582
  14,398
  15,248
  16,132
  17,054
  18,016
  19,019
  20,065
  21,158
  21,678
  22,871
  24,117
  25,421
  26,785
  28,213
  29,707
  31,272
  32,911
  34,627
  36,426
  38,311
  40,287
  42,359
  44,530
  46,808
  49,197
  51,703
  54,331
  57,088
Operating income, $m
  2,292
  1,709
  1,859
  2,016
  2,178
  2,348
  2,524
  2,708
  2,900
  3,100
  3,310
  4,150
  4,378
  4,617
  4,866
  5,127
  5,401
  5,687
  5,986
  6,300
  6,629
  6,973
  7,334
  7,712
  8,108
  8,524
  8,960
  9,417
  9,897
  10,400
  10,928
EBITDA, $m
  3,593
  3,233
  3,441
  3,657
  3,883
  4,118
  4,363
  4,618
  4,884
  5,162
  5,452
  5,755
  6,072
  6,403
  6,749
  7,111
  7,490
  7,887
  8,302
  8,737
  9,193
  9,671
  10,171
  10,696
  11,246
  11,822
  12,427
  13,061
  13,726
  14,424
  15,156
Interest expense (income), $m
  375
  380
  423
  467
  512
  560
  609
  661
  714
  770
  829
  890
  953
  1,020
  1,090
  1,162
  1,238
  1,318
  1,401
  1,489
  1,580
  1,676
  1,776
  1,882
  1,992
  2,107
  2,229
  2,356
  2,489
  2,629
  2,776
Earnings before tax, $m
  1,822
  1,329
  1,436
  1,549
  1,666
  1,788
  1,915
  2,047
  2,186
  2,330
  2,481
  3,260
  3,425
  3,597
  3,777
  3,965
  4,162
  4,369
  4,585
  4,811
  5,048
  5,297
  5,557
  5,830
  6,117
  6,417
  6,732
  7,062
  7,408
  7,771
  8,152
Tax expense, $m
  642
  359
  388
  418
  450
  483
  517
  553
  590
  629
  670
  880
  925
  971
  1,020
  1,071
  1,124
  1,180
  1,238
  1,299
  1,363
  1,430
  1,500
  1,574
  1,651
  1,733
  1,818
  1,907
  2,000
  2,098
  2,201
Net income, $m
  1,182
  970
  1,048
  1,131
  1,216
  1,305
  1,398
  1,495
  1,596
  1,701
  1,811
  2,380
  2,500
  2,626
  2,757
  2,895
  3,038
  3,189
  3,347
  3,512
  3,685
  3,867
  4,057
  4,256
  4,465
  4,684
  4,914
  5,155
  5,408
  5,673
  5,951

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  32
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  20,859
  22,216
  23,647
  25,136
  26,686
  28,300
  29,983
  31,737
  33,566
  35,476
  37,470
  39,552
  41,728
  44,003
  46,382
  48,871
  51,476
  54,202
  57,057
  60,047
  63,179
  66,461
  69,900
  73,505
  77,285
  81,248
  85,403
  89,762
  94,333
  99,129
  104,160
Adjusted assets (=assets-cash), $m
  20,827
  22,216
  23,647
  25,136
  26,686
  28,300
  29,983
  31,737
  33,566
  35,476
  37,470
  39,552
  41,728
  44,003
  46,382
  48,871
  51,476
  54,202
  57,057
  60,047
  63,179
  66,461
  69,900
  73,505
  77,285
  81,248
  85,403
  89,762
  94,333
  99,129
  104,160
Revenue / Adjusted assets
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
  0.653
Average production assets, $m
  11,342
  12,084
  12,863
  13,673
  14,516
  15,394
  16,309
  17,263
  18,258
  19,297
  20,382
  21,514
  22,698
  23,935
  25,230
  26,583
  28,000
  29,483
  31,036
  32,662
  34,366
  36,151
  38,022
  39,983
  42,039
  44,195
  46,455
  48,826
  51,313
  53,921
  56,658
Working capital, $m
  -418
  -29
  -31
  -33
  -35
  -37
  -39
  -41
  -44
  -46
  -49
  -52
  -54
  -57
  -61
  -64
  -67
  -71
  -75
  -78
  -83
  -87
  -91
  -96
  -101
  -106
  -112
  -117
  -123
  -129
  -136
Total debt, $m
  9,310
  10,321
  11,389
  12,499
  13,656
  14,860
  16,115
  17,424
  18,788
  20,213
  21,700
  23,254
  24,877
  26,574
  28,349
  30,206
  32,149
  34,183
  36,312
  38,543
  40,879
  43,328
  45,893
  48,583
  51,402
  54,359
  57,459
  60,710
  64,121
  67,698
  71,452
Total liabilities, $m
  15,562
  16,573
  17,641
  18,751
  19,908
  21,112
  22,367
  23,676
  25,040
  26,465
  27,952
  29,506
  31,129
  32,826
  34,601
  36,458
  38,401
  40,435
  42,564
  44,795
  47,131
  49,580
  52,145
  54,835
  57,654
  60,611
  63,711
  66,962
  70,373
  73,950
  77,704
Total equity, $m
  5,297
  5,643
  6,006
  6,384
  6,778
  7,188
  7,616
  8,061
  8,526
  9,011
  9,517
  10,046
  10,599
  11,177
  11,781
  12,413
  13,075
  13,767
  14,492
  15,252
  16,047
  16,881
  17,755
  18,670
  19,630
  20,637
  21,692
  22,799
  23,961
  25,179
  26,457
Total liabilities and equity, $m
  20,859
  22,216
  23,647
  25,135
  26,686
  28,300
  29,983
  31,737
  33,566
  35,476
  37,469
  39,552
  41,728
  44,003
  46,382
  48,871
  51,476
  54,202
  57,056
  60,047
  63,178
  66,461
  69,900
  73,505
  77,284
  81,248
  85,403
  89,761
  94,334
  99,129
  104,161
Debt-to-equity ratio
  1.758
  1.830
  1.900
  1.960
  2.010
  2.070
  2.120
  2.160
  2.200
  2.240
  2.280
  2.310
  2.350
  2.380
  2.410
  2.430
  2.460
  2.480
  2.510
  2.530
  2.550
  2.570
  2.580
  2.600
  2.620
  2.630
  2.650
  2.660
  2.680
  2.690
  2.700
Adjusted equity ratio
  0.253
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254
  0.254

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,182
  970
  1,048
  1,131
  1,216
  1,305
  1,398
  1,495
  1,596
  1,701
  1,811
  2,380
  2,500
  2,626
  2,757
  2,895
  3,038
  3,189
  3,347
  3,512
  3,685
  3,867
  4,057
  4,256
  4,465
  4,684
  4,914
  5,155
  5,408
  5,673
  5,951
Depreciation, amort., depletion, $m
  1,301
  1,523
  1,581
  1,642
  1,705
  1,770
  1,839
  1,910
  1,984
  2,062
  2,143
  1,606
  1,694
  1,786
  1,883
  1,984
  2,090
  2,200
  2,316
  2,437
  2,565
  2,698
  2,837
  2,984
  3,137
  3,298
  3,467
  3,644
  3,829
  4,024
  4,228
Funds from operations, $m
  3,037
  2,493
  2,630
  2,772
  2,921
  3,075
  3,236
  3,404
  3,580
  3,763
  3,954
  3,985
  4,194
  4,412
  4,640
  4,878
  5,128
  5,389
  5,663
  5,950
  6,250
  6,564
  6,894
  7,240
  7,602
  7,982
  8,381
  8,799
  9,237
  9,697
  10,180
Change in working capital, $m
  77
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
Cash from operations, $m
  2,960
  2,695
  2,632
  2,774
  2,923
  3,077
  3,239
  3,407
  3,582
  3,765
  3,956
  3,988
  4,197
  4,415
  4,643
  4,882
  5,131
  5,393
  5,667
  5,953
  6,254
  6,569
  6,899
  7,245
  7,607
  7,987
  8,386
  8,804
  9,243
  9,703
  10,186
Maintenance CAPEX, $m
  0
  -846
  -902
  -960
  -1,020
  -1,083
  -1,149
  -1,217
  -1,288
  -1,363
  -1,440
  -1,521
  -1,606
  -1,694
  -1,786
  -1,883
  -1,984
  -2,090
  -2,200
  -2,316
  -2,437
  -2,565
  -2,698
  -2,837
  -2,984
  -3,137
  -3,298
  -3,467
  -3,644
  -3,829
  -4,024
New CAPEX, $m
  -1,339
  -743
  -778
  -810
  -843
  -878
  -915
  -954
  -995
  -1,039
  -1,084
  -1,133
  -1,184
  -1,237
  -1,294
  -1,354
  -1,417
  -1,483
  -1,553
  -1,626
  -1,704
  -1,785
  -1,871
  -1,961
  -2,056
  -2,156
  -2,260
  -2,371
  -2,487
  -2,609
  -2,737
Cash from investing activities, $m
  -1,932
  -1,589
  -1,680
  -1,770
  -1,863
  -1,961
  -2,064
  -2,171
  -2,283
  -2,402
  -2,524
  -2,654
  -2,790
  -2,931
  -3,080
  -3,237
  -3,401
  -3,573
  -3,753
  -3,942
  -4,141
  -4,350
  -4,569
  -4,798
  -5,040
  -5,293
  -5,558
  -5,838
  -6,131
  -6,438
  -6,761
Free cash flow, $m
  1,028
  1,105
  952
  1,005
  1,059
  1,116
  1,175
  1,236
  1,299
  1,364
  1,432
  1,334
  1,407
  1,483
  1,563
  1,645
  1,731
  1,820
  1,914
  2,011
  2,113
  2,219
  2,330
  2,446
  2,568
  2,695
  2,828
  2,967
  3,113
  3,265
  3,425
Issuance/(repayment) of debt, $m
  375
  1,043
  1,067
  1,111
  1,156
  1,204
  1,255
  1,309
  1,365
  1,424
  1,487
  1,554
  1,623
  1,697
  1,775
  1,857
  1,943
  2,034
  2,130
  2,230
  2,337
  2,448
  2,566
  2,689
  2,820
  2,956
  3,100
  3,251
  3,410
  3,578
  3,753
Issuance/(repurchase) of shares, $m
  -662
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -309
  1,043
  1,067
  1,111
  1,156
  1,204
  1,255
  1,309
  1,365
  1,424
  1,487
  1,554
  1,623
  1,697
  1,775
  1,857
  1,943
  2,034
  2,130
  2,230
  2,337
  2,448
  2,566
  2,689
  2,820
  2,956
  3,100
  3,251
  3,410
  3,578
  3,753
Total cash flow (excl. dividends), $m
  719
  2,149
  2,019
  2,115
  2,216
  2,320
  2,430
  2,544
  2,663
  2,788
  2,919
  2,888
  3,031
  3,181
  3,337
  3,502
  3,674
  3,854
  4,043
  4,241
  4,449
  4,667
  4,896
  5,136
  5,387
  5,651
  5,928
  6,218
  6,523
  6,843
  7,179
Retained Cash Flow (-), $m
  48
  -346
  -363
  -378
  -394
  -410
  -427
  -446
  -465
  -485
  -506
  -529
  -553
  -578
  -604
  -632
  -662
  -693
  -725
  -759
  -796
  -834
  -874
  -916
  -960
  -1,007
  -1,056
  -1,107
  -1,161
  -1,218
  -1,278
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  1,803
  1,656
  1,737
  1,822
  1,910
  2,002
  2,099
  2,199
  2,303
  2,413
  2,359
  2,478
  2,603
  2,733
  2,869
  3,012
  3,162
  3,318
  3,482
  3,654
  3,834
  4,022
  4,220
  4,427
  4,644
  4,872
  5,111
  5,362
  5,625
  5,901
Discount rate, %
 
  8.20
  8.61
  9.04
  9.49
  9.97
  10.47
  10.99
  11.54
  12.12
  12.72
  13.36
  14.02
  14.73
  15.46
  16.24
  17.05
  17.90
  18.79
  19.73
  20.72
  21.76
  22.84
  23.99
  25.19
  26.45
  27.77
  29.16
  30.61
  32.15
  33.75
PV of cash for distribution, $m
 
  1,666
  1,404
  1,340
  1,268
  1,188
  1,102
  1,011
  918
  823
  729
  594
  513
  436
  365
  300
  243
  192
  149
  114
  85
  61
  44
  30
  20
  13
  8
  5
  3
  2
  1
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Waste Management, Inc., through its subsidiaries, provides waste management environmental services to residential, commercial, industrial, and municipal customers in North America. It offers collection services, including picking up and transporting waste and recyclable materials from where it was generated to a transfer station, material recovery facility (MRF), or disposal site; and owns, develops, and operates landfill gas-to-energy facilities in the United States, as well as owns and operates transfer stations. As of December 31, 2016, the company owned or operated 95 MRFs; and 243 solid waste landfills and 5 secure hazardous waste landfills, as well as 310 transfer stations. It also provides materials processing and commodities recycling services; recycling brokerage services that comprise managing the marketing of recyclable materials for third parties; and other strategic business solutions. In addition, the company offers construction and remediation services; services associated with the disposal of fly ash, and residue generated from the combustion of coal and other fuel stocks; in-plant services, such as full-service waste management solutions and consulting services; and specialized disposal services for oil and gas exploration and production operations. Further, it provides portable self-storage, long distance moving, and fluorescent lamp recycling services; portable restroom services under the Port-o-Let name; and street and parking lot sweeping services, as well as holds interests in oil and gas producing properties. The company was formerly known as USA Waste Services, Inc. and changed its name to Waste Management, Inc. in 1998. Waste Management, Inc. was incorporated in 1987 and is headquartered in Houston, Texas.

FINANCIAL RATIOS  of  Waste Management (WM)

Valuation Ratios
P/E Ratio 27.3
Price to Sales 2.4
Price to Book 6.1
Price to Tangible Book
Price to Cash Flow 10.9
Price to Free Cash Flow 19.9
Growth Rates
Sales Growth Rate 5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 8.6%
Cap. Spend. - 3 Yr. Gr. Rate 1%
Financial Strength
Quick Ratio 0
Current Ratio 0
LT Debt to Equity 167.9%
Total Debt to Equity 175.8%
Interest Coverage 6
Management Effectiveness
Return On Assets 6.9%
Ret/ On Assets - 3 Yr. Avg. 9.1%
Return On Total Capital 8.2%
Ret/ On T. Cap. - 3 Yr. Avg. 10.1%
Return On Equity 22.2%
Return On Equity - 3 Yr. Avg. 26.6%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 45.6%
Gross Margin - 3 Yr. Avg. 44.7%
EBITDA Margin 25.7%
EBITDA Margin - 3 Yr. Avg. 23.8%
Operating Margin 16.8%
Oper. Margin - 3 Yr. Avg. 14.9%
Pre-Tax Margin 13.4%
Pre-Tax Margin - 3 Yr. Avg. 11.4%
Net Profit Margin 8.7%
Net Profit Margin - 3 Yr. Avg. 7.9%
Effective Tax Rate 35.2%
Eff/ Tax Rate - 3 Yr. Avg. 29.3%
Payout Ratio 61.4%

WM stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the WM stock intrinsic value calculation we used $13609 million for the last fiscal year's total revenue generated by Waste Management. The default revenue input number comes from 2016 income statement of Waste Management. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our WM stock valuation model: a) initial revenue growth rate of 6.6% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 8.2%, whose default value for WM is calculated based on our internal credit rating of Waste Management, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Waste Management.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of WM stock the variable cost ratio is equal to 88.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for WM stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.1% for Waste Management.

Corporate tax rate of 27% is the nominal tax rate for Waste Management. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the WM stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for WM are equal to 83.3%.

Life of production assets of 13.4 years is the average useful life of capital assets used in Waste Management operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for WM is equal to -0.2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $5297 million for Waste Management - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 441.717 million for Waste Management is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Waste Management at the current share price and the inputted number of shares is $32.4 billion.


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Stock chart of WM Financial statements of WM
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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