Automation And Renewable Energy Will Drive Future Success

Key Takeaways

• Adoption of technology and automation is set to differentiate Waste Management through improved margins and stronger future earnings.
  
• Strategic investments in sustainability and healthcare solutions integration are poised to drive strong revenue growth and earnings.
  
• Economic pressures, strategic exits, and regulatory changes could lead to revenue volatility and cost pressures, impacting profitability and financial performance.

Catalysts

Through its subsidiaries, provides environmental solutions to residential, commercial, industrial, and municipal customers in the United States, Canada, Western Europe, and internationally.

• The implementation of technology to supplement the workforce and optimize cost structures is expected to be a significant differentiator for Waste Management, potentially leading to improved net margins.
  
• The company's strategic investments in sustainability, particularly in the areas of recycling and renewable energy, are showing strong, high-return growth, which could drive future revenue increases.
  
• The integration and optimization of WM Healthcare Solutions are on track to deliver significant synergies, anticipated to reach $250 million annually by 2027, positively impacting earnings.
  
• The continued focus on scaling the core business through acquisitions, with a robust pipeline and expected higher levels of solid waste M&A, could drive revenue growth.
  
• The adoption of automation and technology, such as automated recycling facilities, is leading to improved EBITDA margins, which might provide stronger future earnings.

Waste Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Waste Management's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $4.0 billion (and earnings per share of $9.87) by about April 2028, up from $2.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.3x on those 2028 earnings, down from 34.4x today. This future PE is greater than the current PE for the US Commercial Services industry at 27.7x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

Waste Management Future Earnings Per Share Growth

Risks

• The potential expiration of alternative fuel tax credits, which provided a 30 basis point headwind, could affect future profitability and net margins of the company.
  
• Economic pressures on the temporary industrial segment and the strategic exit from low-margin residential business could expose WM to revenue volatility and lower internal revenue growth.
  
• Weather-related impacts, such as winter storms, have affected revenue and operating costs, posing a risk to consistent financial performance and margins.
  
• The acquisition of Stericycle has increased leverage, with a current ratio of 3.58x, which could limit financial flexibility and impact earnings if integration does not go as planned.
  
• Dependence on tariffs and regulatory changes related to renewable energies and recycling could create cost pressures and unexpected capex, impacting net margins and cash flows.

Valuation

• The analysts have a consensus price target of $242.672 for Waste Management based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $265.0, and the most bearish reporting a price target of just $191.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $28.8 billion, earnings will come to $4.0 billion, and it would be trading on a PE ratio of 30.3x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $228.8, the analyst price target of $242.67 is 5.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.