Waste Management Earnings: Strong Profit Margin Expansion Drives Earnings Growth

Waste Management WM, the wide-moat leader in U.S. solid waste collection and disposal, reported good third-quarter financial results. Total revenue increased 2.4% year over year to $5.2 billion, which was modestly below our estimate due to easing core price growth (6.6% this quarter versus 8.2% during the year-ago quarter). Nevertheless, price increases outpaced cost inflation, and WM’s adjusted EBITDA margin expanded 100 basis points to 29.6%, 60 basis points above our estimate. Adjusted EPS of $1.63 increased 4.5% year over year.

Total average yield of 1.1% was weighed down by unfavorable recyclable commodity and renewable identification number prices compared with the prior-year period as well as lower surcharges and fees. Volume increased 50 basis points year over year, and acquisitions and foreign exchange contributed 80 basis points of net growth.

In our view, management has done a commendable job managing its cost structure. Automation has reduced labor costs and increased efficiency, and a refreshed fleet should reduce maintenance and repair costs. Additionally, management believes a 9% selling, general, and administrative expense ratio (SG&A as percentage of sales) is maintainable.

Management’s planned investments in recycling and renewable energy projects continues to progress. Two recycling facilities were upgraded with automation and other technology enhancements, and another two are expected to be retrofitted by year-end. WM also expects to have its seventh renewable gas facility operational by January. Management still expects these planned investments will generate $740 million of EBITDA by 2026. That said, some capital expenditures tied to these projects has been delayed to 2024-25. As such, management now targets full-year free cash of $1.825 billion-$1.925 billion, compared with previous guidance of $1.675 billion-$1.775 billion.

After reviewing WM’s third-quarter results and outlook, we’ve maintained our $149 per share fair value estimate.