We're Recycling Our Target as We Eye Key Opportunity in This Holding
Nice progress on margins in 2025 and a promising business segment have us optimistic on this Pro Portfolio stock.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
Ahead of Waste Management’s (WM) quarterly earnings report and Thursday’s late morning earnings call, we proactively locked in some gains, given concerns that extreme winter weather would be disruptive to Waste’s guidance for the next quarter. That proved to be the smart move after seeing the post-earnings dip in the shares. That dip was linked in part to the modest miss delivered by Waste.
Reported earning per share came in at $1.93, two cent shy of expectations, while revenue increased 7.1% year over year to $6.31 billion but fell just short of the $6.39 billion the market was looking for. But for us, the core story of pricing power and leveraging the combination of automation and cost containment at the core Waste business remains in place. Waste management is also delivering on growing the "Healthcare Solutions" business, which posted a more than 50% increase in net operating revenue in the most recent quarter compared to year-ago levels.
That business is still a relatively small part of Waste’s overall revenue stream, but as we know from our position in Labcorp (LH) , medical testing and its waste will continue to grow as the population ages and new tests are approved. We continue to like the long-term prospects for that business as Waste management continues to pull costs out of it.
Healthcare Solutions is now 10% of the business, but as it grows and its margins go from around 16% to the 33% level posted at the legacy Waste business, we should see consolidated Waste Management margins step up further in the coming quarters. The metric that puts a spotlight on management’s cost containment units is operating expenses in 2025, which accounted for 59.5% of revenue, 70 basis points lower compared to 2024, and the first full-year below 60%.
But make no mistake, we could see further improvement in margins and opex leverage at the legacy Waste business as management targets a price increase between 5.4%-5.8% for that business. And an average price increase of 3% is also targeted for the Healthcare Solutions business.
That suggests we should continue to see robust operating cash flow and free cash flow. But that isn’t much of a surprise, because Waste previously announced it would increase its 2026 quarterly dividend per share by 14.5% to $0.945 and restart its share repurchase program to the tune of $2 billion in 2026. During the earnings call, management shared that it sees share repurchase activity continuing beyond this year, but the level will depend on investment opportunities. Reading between the lines, that likely means nip and tuck acquisition volume for the fragmented U.S. waste industry, and maybe something on the medical waste front. In 2025, Waste invested more than $400 million in nip and tuck waste acquisitions, and those should be thought of as targets for automation and cost reduction efforts.
For now, that’s enough for us to maintain our $255 price target. As we see management’s initiatives on both businesses bear fruit, we’ll revisit that target. Should WM shares rebound back to the $230 level, something that would leave around 10% upside to our current price target, we’d be inclined to revisit our One rating.
At the time of publication, Pro Portfolio was long WM and LH.
