Well, turns out it’s the same as the old “Ten Hills Technique.”
Too obscure a reference? It’s OK, not everyone has to remember the rivers of investment teasers that flow through the Thinkolator here at Stock Gumshoe, but this one did ring a bell. There used to be a publisher called Insiders Strategy Group (before that they were called Taipan), and one of their newsletters, Unconventional Wealth (then edited by Aaron Gentzler) put out an overheated teaser pitch to solicit new subscribers — they promised that if you subscribed, they’d send you the details of the natural gas “reverse mining” made possible by the “Ten Hills Technique”.
We figured it out for you, naturally, and wrote it up at the time. Not a shocking company, not a tiny little upstart, but a decent large company — and it has done well. Up about 30% since the teaser ran back in the Summer of 2012. Of course, the S&P 500 is up about the same amount.
Oh, fine, I’ll let the cat out of the bag and you don’t even have to go read that other article — at the time, they were teasing Waste Management (WM). The “reverse mining” bit is about using the methane created by their landfills to generate electricty.
So is the “Ten Hills Technique” still teasing the same idea? That publisher has changed it’s name again, it’s now called Contrarian Profits. And they’ve brought on Zach Scheidt, who we’ve written about for several other letters he has written in the past, to run their Income & Dividend Report. Unconventional Wealth still exists too, though with a different editor now, but it’s the Income & Dividend Report that’s using the “Ten Hills” marketing copy this time around … I guess if you’re a small publisher, you want to be efficient and recycle old copy so you don’t have to hire another writer.
But is it really the same idea and stock they’re teasing? Or did they just reuse the tag line and the basic concept?
Here’s the intro from the ad:
“The Ten Hills Retirement Secret
“Revealed: A patented reverse-mining technology has cemented a virtual monopoly for one surprising company… here’s how you can bank big gains by getting in before word gets out.
“Some say it creates an unfair advantage. I say, who cares?
“There are BILLIONS of dollars at stake.
“Here’s how you can exploit this secret technique to live your dream retirement…”
Sounds pretty much the same so far … how about some specifics?
“Washington, Pennsylvania… sits at the epicenter of the vaunted Marcellus Shale deposit. It’s big news there.
“But there’s one thing everyone is missing about Washington and everywhere else they drill for natural gas:
“The biggest winner in the natural gas market is a company that hasn’t drilled a single well… and never will.
“It’s a unique reverse-mining operation that has sealed its virtual monopoly in a larger industry….
“The company recently estimated that the raw material it buries could produce $40 billion in energy…
“Remember, this company is not a mining company. It doesn’t sell the gas it produces.
“So creating $40 billion of energy is like throwing billions of dollars right to the bottom line. Billions of dollars it can use to slam the door even further on the competition.
“Just as importantly, billions of dollars they could pay out as dividends.
“But unlike drillers that operate under the reality that their supplies will eventually run out… this company’s feedstock will never go away.
“And the kicker is… it gets PAID nearly $14 billion per year to take the feedstock it uses in its Ten Hills Technique.”
And then finally ….
“Right now, the company has 131 sites that can convert the gas to electricity. And that number is planned to grow to 160 projects by the end of this year.
“The company creates enough electricity by burning the gas it produces to power more than 1.2 million households. And it plans to up that number to 2 million homes by 2020.
“But that’s just the tip of the iceberg. This company also uses the reverse-mined gas it produces to power more than 2,000 trucks in its fleet and is in the process of switching over 18,000 more of its vehicles.”
So … yep, they’re still touting Waste Management (WM)
And there’s still nothing really wrong with the company — “trash is cash”, as a friend who used to work for one of their competitors used to tell us, it’s not going away anytime soon and you have to have someone who’s willing to collect and store or process it. WM is a $20 billion company in a still-consolidating business that has two large national players — the other is Republic Services (RSG), and both of the stocks have trailed the S&P over the past five years, largely because they’re finding it harder and harder to grow very quickly (WM has done a bit better than RSG, for whatever that’s worth). They have the biggest landfill network, so they do have plenty of places where they can extract methane, and they are, in aggregate one of the larger “alternative energy” producers in the country.
There is some optimism that they can generate earnings growth again, with a projected increase of 11% in next year’s earnings — the stock trades for about 16X forward earnings, so it’s not cheap but it is a very consistent dividend payer (yield 3.7%, annual dividend increases for the past decade). I don’t expect their methane production to have an impact on their earnings in any meaningful way, but it’s possible — investing in plants to generate electricity at their landfills, and operating them, also costs money even if the feedstock is something they’re paid to collect. The big boost in the stock price has come as much from multiple expansion (meaning, investors are willing to pay a higher PE multiple — perhaps in part because of the dividend) as from actual revenue or earnings growth, WM has not had a PE this high in ten years.
But they are a large, dominant national player, and they do have the advantage of massive scale — they’re continuing to growth through acquisitions, particularly in recycling but also in new landfills and new haulers, and … well, I guess this is as close as you get to a “blue chip” in the garbage business, so it’s a familiar kind of company these days — large, pretty stable, wringing profits out by restructuring, and having trouble generating top-line sales growth without a kick in the pants from the economy (more housing and construction would be good for them, adding customers and construction waste).
I wouldn’t count on “Ten Hills” adding meaningfully to their earnings over the next few years, but it might help improve margins and they’ll probably try very hard to keep increasing the dividend even though their payout ratio is already very high (they have a large debt position and little cash, so it’s a balancing act — presumably their debt is cheap, and they do have lots of very valuable assets so I’m not worried about the debt but this isn’t a cash-rich company, they need debt to grow and it’s all about ongoing cash flow since they pay out about 75% of their earnings as dividends).
And that’s about all I can tell you about Waste Management — the folks at Morningstar, for whatever that’s worth, think the fair value is about $35 and it’s trading at $41 now, so that’s representative of the conservative analyst worries that the company has gotten a wee bit too rich. The average analyst has a price target of about $45 and a “hold” on the stock. That’s my inclination, too, but as long as the dividend remains high and their operations stay on an even keel it’s hard to see the stock dropping dramatically anytime soon.