There are companies on the market that don't stand in the spotlight like tech giants, yet consistently deliver exceptional profitability. They essentially collect a toll from the everyday functioning of the economy without needing to invent revolutionary products.
Waste Management $WM achieves an operating margin above 15% and annually generates free cash flow exceeding $2.5 billion. Regular waste collection seems like an ordinary industry at first glance, but control over key infrastructure changes the rules of the game. The financial markets offer a similarly strong position. Exchange operator CME Group $CME reports an adjusted operating margin even above 70% and maintains a dominant position in financial derivatives trading. Competitor Intercontinental Exchange $ICE , which owns the New York Stock Exchange and energy markets, enjoys similarly high profitability.
The foundation of their success is infrastructure that is practically impossible to replicate. For waste haulers, permitted landfills and transfer stations play the main role. Obtaining a new environmental permit to build a landfill in North America often takes up to ten years and costs enormous amounts in legal fees. Local residents oppose the construction of new facilities, and authorities tighten environmental standards. Existing owners of approved sites thereby gain a local monopoly. They can then regularly raise prices above inflation because customers have nowhere else to go.
Financial exchanges operate on a somewhat different principle: concentrated liquidity and network effects. Traders and large institutions want to operate exclusively where the largest order volume and the narrowest bid-ask spread are. Creating a new platform for trading US Treasury futures is technically easy, but attracting capital from around the world to it is practically nearly impossible. Dominant exchanges thus charge a fee on every trade regardless of whether markets rise or fall.
These businesses do not require constant spending on developing new products because they collect a stable fee for using already built and irreplaceable infrastructure.
However, this model has its risks and above all a high price tag for investors. The stock market is well aware of these companies' strength, which is directly reflected in their valuations. Waste Management shares commonly trade at more than thirty times annual earnings. When revenue and earnings growth slows, room for further multiple expansion disappears. Exchanges also face the risk of prolonged periods of low market volatility, during which trading volumes and overall revenues naturally decline.
I personally hold Waste Management in my portfolio; I bought around $205. I consider it an excellent stable component, but at prices above $220 I just watch the company.
Do you consider the high valuation of these stable companies justified, or do landfill stocks at thirty times earnings simply seem overpriced to you?
