We’re More Confident in Waste Management’s Renewable Energy and Recycling Targets

Waste Management WM held a sustainability investor day on April 5 where the wide-moat-rated solid waste collection and disposal leader provided more details behind its renewable energy and recycling investments, which are expected to total a cumulative $2.2 billion in capital expenditures between 2022 and 2025. By 2026, management continues to expect its landfill gas-to-renewable natural gas and recycling projects to deliver EBITDA of $500 million and $240 million, respectively. Management now also sees an additional $100 million EBITDA opportunity from e-renewable identification numbers and royalties from partnering with third-party RNG developers. The former opportunity would stem from electricity generated from WM’s landfill gas-to-electricity assets that is used to power electric vehicles.

While WM’s financial targets for its RNG and recycling investments have not changed, management provided more details behind its projections, which we found helpful. For example, management disclosed that its recycling investments are expected to add 2.8 million tons of incremental capacity by 2025 and categorized the $240 million EBITDA opportunity into four separate profit opportunities: enhanced material quality ($70 million), expanding capacity in existing markets ($35 million), volume in new markets ($65 million), and labor efficiency ($70 million).

After learning more about WM’s sustainability plans, we’ve become more confident in the firm’s financial projections. We’ve adjusted our valuation model to assume stronger profit margins from 2025-27 as these investment bear fruit, which increased our fair value estimate 5% to $145 per share. Nevertheless, our 2027 adjusted EBITDA estimate of $7.3 billion is about 10% lower than the midpoint of management’s guidance ($8.25 billion in 2027), likely due to our more conservative outlook for WM’s core business and allowing for more volatility from its RNG and recycling operations.