Sustainability And Tech Innovations Propel Revenue And Margin Expansion

Key Takeaways

• Sustainability investments and automation in renewable natural gas projects may drive revenue and earnings growth with improved cost efficiency.
  
• Strategic acquisitions and efficient operations could enhance margins and support revenue growth through synergistic benefits and technology advancements.
  
• Operational challenges in renewable projects, fluctuating recycled prices, and elevated labor costs could pressure margins and impact future earnings.

Catalysts

Through its subsidiaries, engages in the provision of environmental solutions to residential, commercial, industrial, and municipal customers in the United States and Canada.

• Waste Management's recent focus on sustainability investments, particularly in automation and renewable natural gas projects, is expected to drive significant revenue and earnings growth. The completion of these projects could lead to higher margins and improved cost efficiency as operating expenses decrease. (Revenue, earnings, margins)
  
• The integration of the Stericycle acquisition is anticipated to provide synergistic benefits through expanded service offerings and cost reductions, potentially enhancing operating margins and contributing to revenue growth. (Revenue, net margins)
  
• Continued improvements in operating efficiency through technology and automation in collection and disposal operations are expected to drive further margin expansion and cost reduction, positively impacting earnings. (Net margins, earnings)
  
• The successful execution of price optimizations and strategic volume management, including the shedding of lower-margin business, is likely to support healthy revenue growth and margin expansion. (Revenue, net margins)
  
• Anticipated upsides from incremental output in recycling facilities and favorable shifts in recycled commodity prices could contribute positively to operating EBITDA margins, enhancing earnings performance. (Earnings, net margins)

Waste Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Waste Management's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.3% today to 13.6% in 3 years time.
• Analysts expect earnings to reach $3.9 billion (and earnings per share of $9.71) by about November 2027, up from $2.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.8x on those 2027 earnings, down from 33.3x today. This future PE is lower than the current PE for the US Commercial Services industry at 30.6x.
• Analysts expect the number of shares outstanding to decline 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 6.75%, as per the Simply Wall St company report.

Waste Management Future Earnings Per Share Growth

Risks

• The renewable energy projects face operational challenges, including commissioning, testing, and regulatory approvals, which could delay contributions to revenue and earnings.
  
• Rising recycled commodity prices have pressured margins, and fluctuations in these prices could impact future revenue and earnings.
  
• The expiration of the alternative fuel tax credit in 2025 presents a risk of reduced earnings due to a projected $60 million decrease in EBITDA.
  
• Challenges in successfully integrating and realizing synergies from acquisitions, such as the Stericycle merger, could lead to higher-than-expected costs impacting net margins.
  
• Labor costs, particularly for frontline roles, remain elevated, which could erode net margins despite other cost optimization efforts.

Valuation

• The analysts have a consensus price target of $230.45 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 $255.0, and the most bearish reporting a price target of just $181.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $28.4 billion, earnings will come to $3.9 billion, and it would be trading on a PE ratio of 28.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $219.05, the analyst's price target of $230.45 is 4.9% 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.