Waste Management's Earnings Beat Expectation, Stock Gains

-Earnings per share came in at $1.44, 13% higher than the same quarter in the previous year.

-Revenue came in 12% higher at $5.07 billion.

-EBITDA came in at 8.4% higher at $1.42 billion.

“WM is well positioned in any economic environment given the essential nature of the services we provide, the annuity-like characteristics of our revenue, and our reliable business model," said WM President and CEO Jim Fish. "Our solid results in the first half of 2022, driven by our focus on disciplined pricing and cost management, give us confidence in our ability to deliver on our new, higher outlook."

Waste Management, Inc. NYSE: WM is a waste management, comprehensive waste, and environmental services group based out of Houston, Texas.  The company continued to witness strong results across its business segments during the quarter.

Waste Management during the quarter had a number of key 570,000 MMBtu of RNG bringing the total capacity to 21 million. Results for the company continued their good run of form with the landfill segment growing by 10.2%, up from $1.2 billion. Transfer segment revenue grew by  4.1%, and the recycling segment grew by 17.8%. The other business segment grew by 16.2%.

The continuation of strong results points to a business that remains durable regardless of the broader economic environment. Management has indicated they will continue to integrate the business vertically as they look to bring on a number of new additions to their business, including adding RNG plants.

Management has also looked to continuously reduce costs as it looks to add a number of new technologies to its recycling plant. These new technologies should help the company reduce labor costs by 30%. Furthermore, the company is on track to add two new recycling plants by the end of the year.

Disposal yield for the quarter was  6.2% and core prices increased by 20 basis points to 7.5%. Management has indicated that disposal yields and core prices will remain steady into the second half of the year.  New business remains robust, as total volumes grew by around 2.5% y-o-y.

Waste Management’s Results Should Improve In The Second-Half

Management has also indicated that inflationary pressures should reduce in the second half, with cost-saving measures put in place recently, improvements to productivity, and improvements to transportation technology should all contribute to a higher EBITDA.  The blended recycling stream commodity price per ton should go from $131 per quarter to $125 in the second quarter.

Full-year EBITDA should come in at 28%, and total revenue should increase by anywhere from 12-14%. Management had initially expected cash flow to be around $2 billion for the year but now expects anywhere from $2.5-$2.6 billion for the full year, despite an increase in capital expenditure.

Despite economic issues, and consumers reducing their spending slightly, the waste recycling market remains strong globally. The waste management industry is expected to grow by around 5% until 2025, and Waste Manage Inc., being the top waste management services provider, should see outsized gains over the next couple of years.

Valuation and Balance Sheet

Waste Management’s price-to-earnings remains slightly elevated, and considering the waste management industry is a slow-moving one, investors may consider a P/E of 35 and a forward P/E of 28 expensive, especially since interest rates continue to rise. Waste Management does have some pricing power, and net profit margins could head slightly upwards towards 13%, but this would not compensate for the current valuation.

Cash also remains slightly low at around $900 million, but reflects the capital expenditure undertaken over the last couple of years. Management has indicated these investments should start to pay off in the second half of the year and should result in cash flow increases. Debt also remains slightly elevated at around $12.5 billion, and management may have to increasingly allocate capital to bring down that debt during the next couple of years.

Waste Management remains one of the best-run companies, and management’s long-term approach has ensured the company can overcome economic hurdles. The industry also remains important to the day-to-day lives of people, and the combination of strong management translates into a stock that investors are clearly putting a premium on.