Gathering New Information about Stocks, Health, and Sports

         The Waste Management industry is a very nonchalant, yet profitable, area for equity investment. Normally when investing, names such as Republic Services and Allied Waste Industries, do not usually present an appealing nature. However, over the past five years, many of these companies have provided investors with very satisfying returns. One company in particular, Metal Management (MM), not only provides investors with a high potential for profit with its industry strategy, but encourages investors to purchase more shares because of its undervalued status.

         Looking at the business strategy of a company is a very important component for any investor. In the case of Metal Management, Reuters claims that this company, "is a full-service metals recycler in the United States, with 50 recycling facilities located in 17 states." In more general terms, the company purchase scraps of iron and other material from various places and reuses the metal to resell to other companies, usually consumers "including electric-arc furnace mills, integrated steel mills, foundries, secondary smelters and metal brokers." The two types of scraps Metal Management uses, ferrous and non-ferrous, comes from a variety of vendors such as "scrap dealers, peddlers, auto wreckers, demolition firms, and railroads (ferrous)" and "producers of electricity, telecommunication service providers, aerospace, defense and recycling companies that generate obsolete scrap (non-ferrous)." After being broken down, Metal Management either creates large blocks of iron for consumers, or uses the material to make other types of metal including copper, aluminum, and nickel for consumer purchase. Intuitively, this process illustrates that Metal Management is slightly dependent on certain commodities. Fortunately for Metal Management, these metal commodities are relatively high, allowing the company the potential for excess profit. According to the COMEX, Aluminum, while at the lows of 2007, still remain solid near $1.20. And Copper at $3.40 is near the highs of the year. Overall, as dependency for commodities continue to rise, not only for Metal Management, but for all consumers, this company should have no problem, with its current business operation, to be financially sound and sustain this prosperity in the long term.

         Nevertheless, while the given information is intriguing, there are many other companies in this industry which may have similar operation tactics. Therefore, it is required to review the financial endeavors of Metal Management. According to Capital IQ, Metal Management made over $2.23 billion in revenue over the past twelve months. Such number, along with a market-cap of about 1.14 billion, labels this company as a small capitalization company. While some may question the volatility the company may have, technical analysis counterattacks. Since Metal Management's publicly trading debut in 2002, on a calendar-year basis, its share price at very worst has remained flat over the twelve months, collecting a solid gain of nearly 60% in 2006. However, even with such a high price change, Metal Management is still incredibly undervalued.

         As revenue is on the lower end compared to companies such as Allied Waste Services, some may expect strong gross and operating margins from the company. However, many investors may be surprised to find out that last year its respective margins, according to Reuters, of 12.41% and 7.02% were well below industry-respective averages of 36.24% and 15.92%. There may have been even greater surprise to find out that the company reported gross margins below its five year average of 13.19%. Nevertheless, there is an explanation for why Metal Management is still a great purchase.

         First, all three relative competitors to Metal Management, Tetra Tech, Covanta Holding, and Waste Connections, all experienced the same drop in gross margins during the past twelve months�just like the industry. Secondly, companies like Waste Connections not only experienced a drop from its five year average in gross margins, but from operating margins as well. Metal Management on the other hand, saw operating margins grow to 7.02% from its 6.75% five-year average. Thirdly, Metal Management has seen such a huge splash in growth relative to sales and EPS last year. Its sales growth rate of 40.27% over the past twelve months is eight times higher than the industry, and its EPS growth rate during the same time of 89.36% is about 15 times the industry average. Not to mention that these numbers beat out all the aforementioned competitors. In addition, the five-year sales growth rate for Metal Management of 28.71% and five-year EPS growth rate of 22.49% are also significantly higher than industry standards. Therefore, there is still quite a bit of potential for growth, despite lackluster margins.

         What really shines out of Metal Management, however, is when these financial figures are consolidated with its share price value. Looking at the all-important forward P/E ratio of 10.03, according to Capital IQ, Metal Management is significantly undervalued. Its true, the forward and trailing multiples are nearly identical, but compared to the industry average of 26.60 and relative competitor-forward averages (Tetra Tech: 24.00, Covanta Holding: 26.70, and Waste Connections: 19.34), there is no argument against this claim. In addition, other price-sensitive ratios shows a 2008 price to sales ratio of 0.49 and 2008 enterprise value to revenue ratio of 0.48. Respective numbers from competitors (Tetra Tech: 1.13 and 1.13, Covanta Holding: 2.76 and 4.48, and Waste Connections: 2.14 and 2.70) are no match. While Metal Management may still not have broken into positive territory regarding leveraged free cash flow (not uncommon for newly publicly traded companies), price to operating cash flow (which was $50 million last year) at 7.83 is also slightly below industry averages as well. Therefore, the verdict is in. Metal Management is highly undervalued.

         Nevertheless, to further entice investors to purchase shares of this company, Metal Management, over the past twelve months has posted an ROE (27.43%), ROA (18.61%), and ROI (27.04%) significantly above respective industry standards and all other aforementioned companies as well. CEO Daniel Dienst and the company's 1,829 employees have done an excellent job using shareholders capital. Its current ratio of 1.98 in its most recent quarter is also above the industry average at 1.05, illustrating the company's solvency. Even more important, capital spending for the past five years at 71.38% is nearly three times the industry average. This number illustrates that the company is continuing to put a lot of its cash in research and design. This means, that in the future, if revenues continue to growth, Metal Management will see an abundance of cash for shareholder benefits such as buybacks.

         Therefore, with the given information, there is strong evidence to support the claim that Metal Management is a good purchase. With a PEG ratio of 1.69, which is below rivals such as Covanta and Tetra Tech, coupled with a solid dividend yield of 0.68%, any investor will feel the benefits Metal Management has to offer in the coming years. While there may be more risky small-cap equities that have the possibility to yield higher capital gains, for long term investors, recycling is going to continue to be a required practice, and Metal Management has the tools to subsequently benefit far in the future.

-Dennis Biray
June 29th, 2007