Raising Our Price Target for This Holding on Margin Improvement Prospects
After the stock's post-earnings pop, we have also lifted our pickup and panic points for the name.
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After reviewing the company’s June-quarter earnings press release and conference call, we are raising our price target on Waste Management WM to $255 from $245. In addition, following the stock's nice post-earnings report pop, we are reiterating our Two rating but lifting our pickup point for the shares, to $227 from $225, and our panic point, resetting it at $215 from $211.
We are making these adjustments to reflect prospects for further margin improvement in the coming quarters. Near-term, that will reflect continued pricing actions taken in the core waste removal business and further automation across its residential fleet. Management also sees quicker progress integrating WM Healthcare Solutions (the former Stericycle business) and now sees realized synergies toward the upper end of its $80 million-$100 million target for this year. That should help bolster overall EBITDA margins, which came in at almost 30%.
Over time, we see cost reduction and other synergies closing the gap between WM Healthcare Solutions and WM’s legacy business, which hit an EBITDA margin of 31.3%. For us, the real margin target is the collection and disposal operating EBITDA margin of 37.9%, which is offset by the lower-margin recycling business. But management targets higher margins for that business, leveraging its growing experience in automation.
As the digestion of WM Healthcare Solutions continues, company management still targets other nip-and-tuck acquisitions. During the earnings call, the group commented on a robust pipeline with expected acquisition spending topping $500 million this year. While that is a modest amount relative to WM's 2025 revenue guidance of $24.275 billion-$25.475 billion, the longer-term play with these acquisitions is to bring their margins up to WM's levels, allowing the company to capture the incremental profit.
During WM’s 2025 Investor Day in late June, presentation materials indicated the company had a roughly 18% share of the U.S. and Canadian waste and recycling industry. Excluding sizable competitors, including Republic Services RSG, Waste Connections WCN, GFL Environmental GFL, and Clean Harbors CLH, smaller competitors accounted for just over 50% of the industry. That’s a long runway of acquisition and integration opportunities that should help drive EBITDA and EPS higher over time. That keeps us interested in remaining WM owners.
While we do not build acquisitions into our expectations, as new ones are announced and subsequently integrated, we’ll reflect that in our WM price target.
At the time of publication, TheStreet Pro Portfolio was long WM.
