WM's Eco-Friendly Strategies And Smart Investments Promise Bright Financial Future

Key Takeaways

• WM's disciplined pricing and cost optimization strategies aim to improve profitability, reduce churn, and enhance operating EBITDA margin.
  
• Investments in recycling and renewable energy, alongside expansion in services like the partnership with Major League Baseball, are designed to drive revenue growth and future EBITDA margin improvement.
  
• Reliance on technological advancements, favorable regulatory environments, and continuous cost improvements presents risks to operational efficiency, revenue growth, and profitability.

Catalysts

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

• WM's disciplined pricing strategy across each line of business leverages customer-specific analysis to optimize price, reflecting the value of the services, asset network strength, and commitment to environmental sustainability, expected to improve profitability and reduce customer churn, thus impacting net margins and revenue positively.
  
• Substantial progress on cost optimization efforts, including technology use to reduce operational costs, is projected to maintain and enhance operating EBITDA margin, indicating a positive effect on net margins.
  
• Commitment to sustainability through strategic investments in recycling and renewable energy businesses, including upgrading recycling facilities and expanding renewable natural gas (RNG) facilities, aims at driving future growth in revenue and EBITDA margin.
  
• Expansion of service offerings as the official sustainability partner of Major League Baseball allows WM to leverage expertise to enhance environmental impact, potentially opening new revenue streams and contributing to revenue growth.
  
• Strong operational performance in the collection and disposal business, underpinned by operational efficiency and process optimization, is expected to continue delivering top-line growth and improving operating EBITDA, reflecting positively on earnings and cash flow.

Assumptions

• Analysts are assuming Waste Management's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 14.1% in 3 years time.
• Analysts expect earnings to reach $3.6 billion (and earnings per share of $8.93) by about September 2027, up from $2.5 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 29.5x on those 2027 earnings, down from 32.4x today. This future PE is greater than the current PE for the US Commercial Services industry at 27.3x.
• Analysts expect the number of shares outstanding to decline by 0.92% 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.

Risks

• A reliance on technological advancements and automation for operational efficiency could present risks if these technologies fail to deliver the forecasted cost savings, impacting net margins.
  
• Dependency on favorable regulatory environment regarding recycling and landfill operations could be a risk if regulations become more stringent, potentially increasing operational costs and affecting net margins.
  
• The expectation of continuous improvement in labor and repair maintenance costs might not be sustainable long-term, risking future earnings if costs stabilize or increase, affecting operating EBITDA and margin.
  
• Heavy investment in upgrades for recycling facilities and renewable energy projects carries execution risks, which could impact revenue growth and profitability if these projects do not meet performance expectations.
  
• Market dynamics, such as a slowdown in sectors like home building and industrial activity, could lead to decreased volumes in roll-off business, affecting total revenue growth expectations.

Valuation

• The analysts have a consensus price target of $222.71 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 $25.3 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 29.5x, assuming you use a discount rate of 6.6%.
• Given the current share price of $205.51, the analyst's price target of $222.71 is 7.7% 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.