Unveiling Waste Management's Fair Value: A Comprehensive Analysis

Waste Management, Inc. (NYSE: WM) is a leading provider of waste management and environmental services, with a significant presence in North America. As an investor, understanding the fair value of WM is crucial for making informed decisions. This article delves into the calculation of WM's fair value using the Peter Lynch formula and explores the impact of earnings and growth rates on its valuation.

The Peter Lynch formula for calculating the fair value of a growing company is:
Fair Value = Earnings Growth Rate x TTM EPS

For WM, the 5-year average earnings growth rate is 4.78%, and the trailing twelve-month (TTM) EPS is $6.94. Plugging these values into the formula, we get:
Fair Value = 4.78% x $6.94 = $33.05

However, the Peter Lynch formula uses the average growth rate of net income over the last 5 years. In WM's case, the 5-year average EBITDA growth rate is 10.52%, which is more relevant for a non-bank company. Using this growth rate, the fair value calculation becomes:
Fair Value = 10.52% x $6.94 = $73.01

Comparing WM's price-to-Peter-Lynch-fair-value ratio to its historical range and industry median provides valuable insights into its valuation. As of October 13, 2024, WM's share price is $211.81, resulting in a price-to-fair-value ratio of 2.90. This ratio ranks worse than 84.29% of companies in the waste management industry, with an industry median of 1.06.

Historically, WM's price-to-Peter-Lynch-fair-value ratio has ranged from 1.38 to 6.47, with a median of 3.28. The current ratio of 2.9 falls within this range, indicating that WM's valuation is in line with its historical averages.

In conclusion, the fair value of Waste Management, Inc. (NYSE: WM) can be calculated using the Peter Lynch formula, with the 5-year average EBITDA growth rate being the most relevant metric for a non-bank company. WM's price-to-Peter-Lynch-fair-value ratio, when compared to its historical range and industry median, suggests that its current valuation is reasonable. However, investors should continue monitoring WM's earnings and growth rates, as changes in these factors can significantly impact its fair value over time.