Renewable Energy Projects And Stericycle Acquisition Will Improve Future Operational Efficiency

Key Takeaways

• Strategic investments in technology, automation, and sustainability will enhance efficiencies, lower costs, and drive earnings growth.
  
• Strategic acquisitions and divestments will optimize business mix and synergies, boosting revenue and net margins.
  
• Challenges from acquisition integration, tax credit expiration, and market fluctuations could pressure Waste Management's margins, impacting profitability, revenue, and shareholder returns.

Catalysts

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

• Ongoing investments in technology, automation, and sustainability are expected to enhance operational efficiencies and lower costs, which could improve net margins and drive future earnings growth.
  
• The completion and operation of new renewable natural gas facilities and recycling automation projects are expected to significantly increase revenue and add approximately $800 million to operating EBITDA by 2027, which is likely to boost earnings.
  
• Strategic acquisitions, such as that of Stericycle, are expected to provide substantial synergy opportunities, with $250 million in synergies anticipated over three years. These are expected to contribute significantly to net margin improvements and earnings.
  
• The company aims to continue shedding low-margin residential routes, improving the business mix, which has already resulted in a significant increase in operating EBITDA margin for the residential line. This strategic focus will likely enhance overall net margins and profitability.
  
• WM Healthcare Solutions, the newly acquired business, is projected to grow about 9% before synergies in 2025, driven by organic revenue growth and operational initiatives, potentially boosting overall revenue and earnings.

Waste Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Waste Management's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.4% today to 13.5% in 3 years time.
• Analysts expect earnings to reach $3.8 billion (and earnings per share of $9.57) by about March 2028, up from $2.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.6x on those 2028 earnings, down from 33.1x today. This future PE is greater than the current PE for the US Commercial Services industry at 30.0x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.31%, as per the Simply Wall St company report.

Waste Management Future Earnings Per Share Growth

Risks

• The expiration of alternative fuel tax credits is expected to create a $63 million headwind in 2025, which could negatively impact operating EBITDA and overall profitability.
  
• The integration of the Stericycle acquisition may face challenges, including ERP system issues and achieving projected synergies, which could strain operating margins and net income.
  
• Potential fluctuations in recycled commodity and RIN (Renewable Identification Number) prices could introduce earnings volatility, affecting net margins and free cash flow generation.
  
• The ongoing intentional shedding of low-margin residential contracts could result in a decline in volume, which may negatively impact revenue growth unless offset by margin improvements.
  
• The forecasted rise in interest expenses and cash taxes could exert pressure on net earnings and free cash flow, potentially affecting shareholder returns and debt reduction plans.

Valuation

• The analysts have a consensus price target of $235.076 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 $262.0, 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 $28.4 billion, earnings will come to $3.8 billion, and it would be trading on a PE ratio of 30.6x, assuming you use a discount rate of 7.3%.
• Given the current share price of $225.87, the analyst price target of $235.08 is 3.9% 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.