Sustainable Growth And Tech Innovation Fuel Bright Future For The Commercial Services Industry

Key Takeaways

• Strategic acquisitions and technology integration enhance services, driving revenue growth and long-term earnings improvements.
  
• Cost optimization and renewable projects improve margins and boost future earnings potential.
  
• Integration risks and rising costs from acquisitions, sustainability investments, and wage inflation could pressure Waste Management's earnings, margins, and cash flow.

Catalysts

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

• Cost optimization efforts and disciplined pricing programs are increasing the spread between price growth and the cost to serve, expected to positively impact net margins and earnings.
  
• Integration of acquisitions in key markets, including Stericycle, is expected to enhance service offerings and drive revenue growth, contributing positively to future earnings.
  
• Completion of 24 out of 39 recycling projects has increased annual recycling capacity and reduced labor costs per ton, improving operating EBITDA margins and expected to boost future earnings.
  
• New renewable natural gas projects are projected to add significant production capacity, with anticipated contributions from these investments providing a substantial boost to future revenue and earnings.
  
• The strategic focus on technology and automation is driving operational efficiency, reducing turnover, and expected to continue providing long-term improvements in net margins and earnings.

Waste Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Waste Management's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.3% today to 13.7% in 3 years time.
• Analysts expect earnings to reach $3.6 billion (and earnings per share of $9.05) by about October 2027, up from $2.6 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 30.2x on those 2027 earnings, down from 33.3x today. This future PE is greater than the current PE for the US Commercial Services industry at 26.1x.
• Analysts expect the number of shares outstanding to decline by 0.33% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.64%, as per the Simply Wall St company report.

Waste Management Future Earnings Per Share Growth

Risks

• The acquisition of Stericycle involves integration risks and incremental costs, which may weigh on earnings and operational performance in the near term as these costs are not reflected in current guidance.
  
• The sustainability growth investments are facing increased capital expenditure expectations due to inflation and other factors, potentially impacting free cash flow and margins compared to initial forecasts.
  
• The potential risk associated with recycling commodity prices and their volatility could result in pressure on revenue and operating EBITDA margins, particularly in the brokerage business.
  
• Any changes to the Investment Tax Credit (ITC) legislation or interpretations related to the Inflation Reduction Act could adversely affect anticipated tax benefits, impacting net income and cash flow projections.
  
• Despite improvements in operational efficiencies, ongoing wage inflation and increased costs for frontline labor in the workforce remain a challenge, possibly affecting net margins as competitive wage rates are on the rise.

Valuation

• The analysts have a consensus price target of $225.43 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 $251.0, and the most bearish reporting a price target of just $170.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $26.2 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 30.2x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $219.11, the analyst's price target of $225.43 is 2.8% 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.