Waste Management (NYSE: WMI) is the largest provider of municipal solid waste management in the U.S. with a roughly 26% share of the $52 billion industry.

Roughly 64% of revenues come from waste collection fees, 22% from landfill-related tipping fees, 9% from recycling and 5% from WMI's waste-to-energy operation, Wheelabrator.

Competitive Advantages:  WMI's primary competitive advantage lies in its unparalleled network of landfill capacity. In total, WMI owns or operates 283 landfills in the U.S. — capable of handling some 116 million tons of waste per year. This represents the largest number of landfills of any U.S. waste management firm.

Even better, WMI's landfills are far from full — the company estimates that its facilities have 30 years of life left. That means WMI could keep collecting and depositing waste at its current rate for roughly three decades without running out of capacity. Currently, WMI has filed for expansion permits for more than 50 of its existing facilities; if all those permits are granted, then WMI's remaining landfill life will top 37 years.

And WMI's landfills are well-diversified geographically, meaning WMI has access to landfill capacity in just about every imaginable market for waste disposal. In total, about 70% of WMI's markets include both collection and landfill capacity.

And in addition to plain vanilla landfills, WMI has a huge network of other waste disposal facilities. The list includes 131 waste recycling centers capable of handling 8 million tons of recyclable materials per year — the largest network of recycling capacity of any waste management firm. And WMI also owns 370 transfer facilities used to temporarily hold and consolidate waste before transport to landfills.

Given the extensive regulatory barriers for building new landfill, recycling, and transfer station capacity, it would be very difficult, time-consuming, and expensive for a competitor to recreate WMI's asset base. And since the top three waste management players own nearly two-thirds of U.S. landfill capacity, it would be impossible for a competitor to buy up small landfill owners to recreate WMI's capacity.

This gives WMI two key advantages. First, the company internalizes the majority of its waste volumes, meaning it both collects and landfills its own waste. In addition, the company can charge lucrative tipping fees for competitors to dispose of waste on its properties or in its recycling centers.

Growth Drivers:  The main growth driver for WMI is a renewed focus on profitability over volume growth. WMI has been purposely giving up business and waste volumes in recent years.

The reason is simple — WMI is allowing marginally profitable collection contracts to expire, and management has refused to bid aggressively just to win business. Instead, the company has been refocusing attention only on markets where it has a competitive advantage because it owns both landfill capacity and collection infrastructure. Due to the size of WMI's landfill network, this focus still leaves plenty of high-potential markets, and the end result of these measures has been strong growth in profitability.

Since total waste volumes processed by WMI have been falling over the past couple of years, the firm's recent growth is a direct result of efforts to increase pricing and focus only on the most profitable contracts. Overall operating margins — a measure of operating profits divided by total revenues — jumped from 15.6% in 2006 to 16.9% in 2007. With a significant number of important contracts due to reset in 2008, WMI has plenty of additional room to fuel growth by raising prices in markets where it has a near-monopolistic position.

Valuation and Outlook:  WMI trades at 14 times estimated 2009 earnings and sports a long-term growth rate of +11%. That yields a P/E-to-growth ratio (PEG) of 1.3 — a cheap valuation for a company with such a steady earnings profile.

Even better, WMI's renewed focus on its most profitable markets has led to a surge in free cash flow generation. WMI generated nearly $1.2 billion in free cash flow for 2007. In 2008, WMI expects to generate enough free cash flow to pay $530 million in total dividends and manage $870 million in stock repurchases. Both repurchases and rising dividend payouts are shareholder-friendly moves for WMI.

Finally, while WMI's Wheelabrator waste-to-energy business accounts for only a small chunk of total revenues, it's still the second-largest waste-to-energy player in the world. Wheelabrator is expecting decisions on five new waste-to-energy projects for 2008; contract wins for this business could expand its importance to WMI's revenue pie and offer an additional upside catalyst for the shares.

With all of these factors in mind, WMI looks like a solid recession-proof "Buy" at any price below $45 per share.