Waste Management

WM's second-quarter results were in line with the themes affecting the waste industry. Pricing gains and energy surcharges supported yield and margins, while volume and commodity prices remained key headwinds. The firm reported $2.02 in adjusted earnings per share, 5.2% higher year over year.

Why it matters: Organic revenue growth was 3.5%, driven by 4.3% growth in average yield, partially offset by a negative 0.3% contribution from a volume decline due to the intentional shedding of residential business and continued weakness in healthcare solutions resulting in a 0.5% headwind. The yield growth during the quarter was supported by energy surcharges to offset higher fuel prices. The revenue outlook for 2026 was reduced by 0.6% due to lower volume expectations, partially offset by higher energy surcharges. Adjusted EBITDA margin continued to be the highlight and was 30.9% during the quarter, up 40 basis points year over year, as the firm continued to execute well on its efficiency initiatives. Adjusted EBITDA margin guidance for 2026 is 31.0%-31.2%, which we think is impressive in the current context.

The bottom line: We are maintaining our $220 fair value estimate for wide-moat-rated WM and continue to believe that the shares are slightly overvalued. The firm is set for strong free cash flow growth as sustainability-related capital spending moderates and cash flow from previous investments grows. While we are constructive on the firm's moat and pricing power, we caution investors that competitive dynamics in the industry put a cap on how much margins can improve from the current level. We expect midcycle adjusted EBITDA margins to be around 31%-32%.

Big picture: While commodity price movements and sustainability investments can have a near-term impact, pricing gains in the core business will be the main driver of long-term cash flow growth. We expect average yield growth of around 3.5%-4.0% in the next five years.

The impact of AI and automation is increasingly becoming a core part of the story for the industry. For instance, management highlighted that the smart truck platform generates more than $300 million of annual run rate EBITDA through service upgrades, optimized routing, and lower operating costs. In another example, management highlighted that recycling automation projects are driving a sustained 30% improvement in labor cost per ton compared to legacy facilities. AI-enabled pricing and customer servicing tools, autonomous long-haul vehicles, and remote-operated heavy equipment, are future looking examples of further efficiency improvements. We see these developments positively but continue to believe that long term margin potential in the core business continues to be more a function of competitive intensity rather than standalone efficiency improvements.

We are increasing our fair value estimate to $220 per share from $210 per share due to the time value of money and slightly higher midcycle projections. Our fair value estimate equates to around 26 times our adjusted EPS estimate for 2026 and a forward EV/adjusted EBITDA of around 13 times. Our weighted average cost of capital for the firm is 6.8% based on a cost of equity of 7.5%, a 22.5% long-term tax rate, and an 80% equity weighting.

WM completed its acquisition of Stericycle in 2024 for an enterprise value of $7.2 billion, and an implied EV/EBITDA multiple of about 15 times. Stericycle was in the midst of a turnaround, and we believe the business is still underearning its long-term potential. WM is targeting $300 million in synergies, which we think is an achievable target. Including these synergies, we expect the margin profile for the Stericycle business (WM Healthcare) to improve over time. WM has proven adept at integrating and extracting synergies from acquisitions, and we’re confident in management’s plan for Stericycle. We expect WM Healthcare’s revenue to grow at around 5-6% CAGR over the next five years.

After a 1.5% revenue contraction in 2020 due to the coronavirus pandemic, revenue rebounded 18% in 2021 and another 10% in 2022 as the US economy recovered and WM realized the full contribution from the Advanced Disposal acquisition. WM achieved exceptional pricing (average yield of more than 8%) in 2021 and 2022 as inflation reached levels last seen in the 1980s. In our view, WM's pricing power is a feature of its wide economic moat. In 2023, revenue increased by nearly 4% on a year-over-year basis as core pricing remained strong, but recycling yield became a notable headwind. Revenue growth accelerated in 2024 to 8% due to solid pricing gains and the Stericycle acquisition. The firm achieved 14% revenue growth in 2025, mostly on the back of acquisitions as yield growth moderated.

Between 2026 and 2030, we project that the firm can post organic top-line expansion at about 4%-5% annually as pricing moderates. We forecast average collection and disposal yield of around 3.5% annually and slightly higher recycling yields as commodity prices recover. We project average annual volume growth of 0.75% during this period. Additionally, we forecast another 150 basis points of average annual growth from tuck-in acquisitions.

Our EBITDA margin forecast assumes that the company can preserve many of the efficiencies it’s gained over the past five years and successfully extract cost synergies from future acquisitions. We also believe that the firm's renewable energy and recycling investments will support stronger profitability. That said, we think the Stericycle acquisition will be modestly margin-dilutive, at least over the near term. We temper our EBITDA margin expansion expectations in 2029-30 to our view of a midcycle level of profitability (that is, roughly 31%-32%). Our midcycle gross margin and selling, general, and administrative expenses as a percent of revenue expectations for the firm are 40.6% and 9.3%, respectively. Our midcycle margin assumption takes into consideration industry cyclicality as well as potential margin headwinds from lower landfill volumes due to greater adoption of landfill alternatives, dilutive acquisitions, commodity volatility, and so on.

Our forecast assumes capital expenditures will stabilize in the next five years as the firm's heavy sustainability investments moderate. We expect midcycle capital expenditure as a percentage of revenue to decline to about 10%, resulting in strong free cash flow generation. We expect free cash flow to the firm (before acquisitions) of around $4.0 billion in 2027 and $5.0 billion in 2030.

The second stage of our valuation model assumes that WM can generate an average of 20% RONIC and 5% earnings growth for 15 years after our five-year explicit forecast period. The second and third stage assumptions imply a terminal EV/EBITDA multiple of 12.3 times.

We believe that WM deserves a wide moat rating stemming from intangible assets associated with its ownership of landfill assets and cost advantage emanating from route density. A network of well-located landfills is an extremely scarce resource in the US that is almost impossible for a new entrant to replicate, creating an intangible asset moat. Cost advantage comes from the sheer magnitude and advantageous location of the network of landfill assets, which leads to lower disposal costs for the company and an industry-leading route density in waste collection, leading to higher utilization of the capital base and efficiency.

Together, these two moat sources create a high barrier to entry and protect excess returns for the firm. WM has the biggest scale in the industry and has the highest internalization rates (percentage of waste disposed at its own facilities). We have very high confidence in the firm's ability to generate excess returns over the next 10 years, and we think it's more likely than not that excess returns will persist over the next 20 years. The industry has consolidated significantly over the past few decades, and the moats for the largest players in the industry have only become wider. The firm's pricing power and the industry's relatively recession-resilient characteristics, coupled with high visibility of future cash flows, give us confidence in our wide moat rating.

Industry Dynamics: The industry has gone through continuous consolidation over the past several decades, leading to better competitive positioning for the larger incumbents. The scale advantage inherent in the business is evident in the gross margin profile of publicly traded players in the industry. WM, Republic Services, and Waste Connections all have an average gross margin of around 40%, which is materially higher than the margin profile of smaller peers. We think the difference can be explained by denser route disposal networks that make it more cost-effective for one garbage truck to serve an entire location, higher internalization and tech adoption, and better landfill assets.

Landfills Are a Scarce Commodity: The regulatory intangible assets stemming from WM’s irreplaceable landfill footprint are at the heart of our argument and are the firm’s primary and most durable moat source. Federal and state regulations and not-in-my-backyard (NIMBY) activism have continued to make it very costly to operate and close landfills and extremely difficult to receive approval for new landfills. The regulatory burden has increased continuously, and more regulations disproportionately favor larger, established players in the industry, with capital and expertise. Since disposal costs are a significant expense for waste haulers, owning strategically located disposal assets (landfills and transfer stations) can yield a cost advantage in local markets over smaller competitors (with low internalization) that transport waste over longer distances. WM estimates that it has the best-positioned landfill in nine out of the 10 largest MSAs in the US, demonstrating the quality of the firm's landfill portfolio.

A significant number of landfills in the US are expected to close in the next 15 years, which further strengthens the pricing power of operating landfill assets. Industry sources estimate that 400 landfills are expected to close in the next 15 years, leading to 150 million tons of capacity going offline. Strategically located landfills will become scarcer, and regulatory approvals for newer landfills are only getting more difficult to obtain. The weighted average remaining landfill life for WM’s landfills is estimated at approximately 39 years after considering remaining airspace, expansion airspace, and projected annual disposal volume.

Efficient Scale Characteristics: Even if regulations and NIMBY opposition was relaxed and landfill construction costs decreased, we think that there would still be limited incentives for new entrants because waste disposal has most of the characteristics of an efficient scale market—mature demand, adequate capacity (existing landfills have long useful lives), commodity products, inelastic demand, and high sunk costs—and new entrants would lower the industry's returns below the cost of capital.

Route Density Enhances Cost Advantage: Waste collection is like other route-based businesses, where superior route density is a meaningful cost advantage over smaller competitors and would-be new entrants. Scale matters in route-based businesses (in this case, collection through disposal) because it provides greater utilization and leverage over a vast cost base (costs linked to landfill ownership, collection equipment, transfer facilities, and so on) relative to smaller providers.

WM Healthcare Solutions: We view WM Healthcare Solutions, which requires low-margin, as a narrow-moat business that has some synergies with WM’s existing core disposal business. The firm dominates the medical waste space, as existing entrants find it difficult to enter this niche market requiring specialized capabilities. This segment has scale-driven cost advantages from route density, while also holding intangible assets such as licenses and permits that allow it to dispose of hazardous waste. Customers are reluctant to switch hazardous waste disposers because of the high-risk, low-margin nature of the service.

Recycling and Energy Businesses: Recycling and renewable energy segments are essentially a no-moat business. Both segments lack pricing power or a sustainable cost advantage because the final product is largely a commodity. We see these businesses as essential projects that the company has to undertake to burnish its sustainability credentials and to increasingly comply with stricter regulations. On a relative basis, we like the energy business more than the recycling business, given the return characteristics of landfill gas-to-energy projects.

WM has a stable business model and enjoys a wide economic moat rooted in intangible assets (regulatory permits for landfills) and cost advantages (route density).

Under WM's ownership, Stericycle (now WM Healthcare Solutions) has stronger revenue growth and profit margin prospects. WM has further opportunities to expand in the adjacent medical waste space.

Significant investments in renewable energy generation and recycling projects should support stronger earnings and free cash flow growth and raise the firm's already strong ESG profile.

It's becoming increasingly difficult to find quality tuck-in acquisitions that move the needle for WM, which opens up the temptation to pay higher multiples for incremental M&A or overspend on large, complex, and noncore transactions.

Many US municipalities are gradually pushing for greater solid waste reduction and recycling, which could temper the level of higher-margin waste entering WM's landfills over the long run.

WM currently trades at a rich multiple, and its record profit margins may face downward pressure as pricing normalizes.