Waste Management (NYSE:WM) stock is up about 14% year-to-date, with investors expecting another year of record profits for the waste collection company. The company’s Q1 report was stellar, highlighting its pricing power and significant margin expansion capabilities. This trend is set to last throughout the rest of the year, setting the stage for record profits. Yet, investors should remain wary about the stock’s premium valuation, which could hamper future returns. Accordingly, I am neutral on the stock.
Exploring WM’s Q1 Results — Setting the Stage for Record Earnings
Waste Management’s rally year-to-date is likely supported by investors’ enthusiasm for another year of record earnings. This comes after a stellar first-quarter report in which Waste Management celebrated solid revenues, expanding margins, and strong net income growth. Let’s take a deeper look.
Revenues: Pricing Programs Drive Consistent Growth
Waste Management posted record Q1 revenues of $5.16 billion, up 5.5% year-over-year, driven largely by core price increases of 7.3%. While the company did experience some softness in collection and disposal volumes, reflecting some slowness in the homebuilding and industrial segments of the macroeconomy, its pricing power was as strong as ever.
This result once again essentially shows how easily and organically Waste Management can grow due to the critical nature of its company’s business model (i.e., providing vital waste collection, transportation, and processing services, which are essential for all communities and businesses). In fact, during the post-earnings call, management emphasized recent enhancements to the company’s pricing programs.
Waste Management is now leveraging customer-specific analysis to determine each customer’s journey stage and develop actionable pricing strategies. This aspires to upgrade customer retention, improve profitability, or, hopefully, achieve both objectives. Details are hard to come by, of course, but to me, it’s a hint that high-single-digit price increases will be a common theme in the future.
Pricing and Cost Efficiencies Force Strong Margin Expansion
Thanks to higher revenues, Waste Management enjoyed enhanced unit economies, particularly since the growth was driven by higher pricing. Along with cost optimizations and internal efficiency initiatives, the company achieved significant margin expansion.
For instance, during the quarter, Waste Management automated more than 650 routes and shifted nearly 800 rear-load trucks to automated side-load ones since 2022. Management claimed that this has led to an upward of 30% efficiency gain and residential EBITDA margins inching toward 20%. They also stressed that investing in such technologies and improving driver retention led to a 135-basis-point improvement in labor costs as a percentage of revenue.
Hence, Waste Management’s adjusted operating EBITDA margin expanded 240 basis points to 29.6%. The strong margin expansion, along with its solid revenue growth, led to net income growth of nearly 33% to $708 million.
Guidance Points to Record Earnings, But Valuation Concerns Persist
Waste Management’s excellent earnings growth in Q1 and management’s full-year guidance point to record earnings in FY2024. That said, I still find it hard to justify Waste Management’s current valuation. To explain, management expects revenue growth to be between 5.00% and 5.75% for the full year. They also expect an adjusted operating income margin between 29.7% and 30.2%.
Based on these estimates, Wall Street sees adjusted earnings per share (EPS) of $7.32, which implies a new record for the company. Nevertheless, this figure also implies that shares are trading at a forward P/E of about 28.2x.
I believe this is a very rich multiple, given that Waste Management’s EPS growth could normalize in the high-single digits in the long run. A counterargument to that is that Waste Management has historically traded at very rich valuations due to the highly attractive characteristics of its business model. Still, this multiple at today’s interest rates environment could hamper investors’ future returns prospects, moving forward.
Is WM Stock a Buy, According to Analysts?
Looking at Wall Street’s view on the stock, Waste Management has a Moderate Buy consensus rating based on nine Buys and eight holds assigned in the past three months. At $226.13, the average WM stock forecast suggests 11.1% upside potential over the next 12 months.
If you’re wondering which analyst you should follow if you want to buy and sell BKNG stock, the most accurate analyst covering the stock (on a one-year timeframe) is Noah Kaye of Oppenheimer, with an average return of 20.86% per rating and a 93% success rate. Click on the image below to learn more.
Conclusion
In conclusion, Waste Management’s Q1 earnings once again exhibited strong pricing power and margin expansion capabilities. The company’s ongoing momentum suggests the potential for continued growth and record earnings in FY2024. Still, concerns linger regarding its premium valuation.
Despite its excellent results and promising outlook for FY2024, the forward P/E ratio of about 28.2x raises questions about the stock’s future return prospects. A potential valuation compression could notably offset gains powered by Waste Management’s earnings growth and dividend. Thus, I believe investors should approach WM stock with caution.
