Waste Management (NYSE:WM) Posts Q2 Sales In Line With Estimates But Stock Drops
Waste management services provider Waste Management (NYSE:WM) reported results in line with analysts' expectations in Q2 CY2024, with revenue up 5.5% year on year to $5.40 billion. It made a GAAP profit of $1.69 per share, improving from its profit of $1.51 per share in the same quarter last year.
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Waste Management (WM) Q2 CY2024 Highlights:
Revenue: $5.40 billion vs analyst estimates of $5.43 billion (small miss)
EPS: $1.69 vs analyst expectations of $1.80 (6.2% miss)
Gross Margin (GAAP): 39.1%, up from 37.8% in the same quarter last year
Free Cash Flow of $709 million, similar to the previous quarter
Market Capitalization: $87.78 billion
“Based on our great performance to start 2024 and our confidence in the strength of our business, after the first quarter we raised our full-year outlook for adjusted operating EBITDA and free cash flow by $100 million. Our second quarter results are tracking to this higher trajectory and reflect continued momentum on our pricing programs and cost optimization efforts in our collection and disposal business,” said Jim Fish, WM’s President and Chief Executive Officer.
Headquartered in Houston, Waste Management (NYSE:WM) is a provider of comprehensive waste management services in North America.
Waste Management
Waste management companies can possess licenses permitting them to handle hazardous materials. Furthermore, many services are performed through contracts and statutorily mandated, non-discretionary, or recurring, leading to more predictable revenue streams. However, regulation can be a headwind, rendering existing services obsolete or forcing companies to invest precious capital to comply with new, more environmentally-friendly rules. Lastly, waste management companies are at the whim of economic cycles. Interest rates, for example, can greatly impact industrial production or commercial projects that create waste and byproducts.
Sales Growth
A company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Over the last five years, Waste Management grew its sales at a mediocre 6.5% compounded annual growth rate. This shows it couldn't expand in any major way and is a tough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Waste Management's recent history shows its demand slowed as its annualized revenue growth of 5% over the last two years is below its five-year trend.
This quarter, Waste Management grew its revenue by 5.5% year on year, and its $5.40 billion of revenue was in line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 7.1% over the next 12 months, an acceleration from this quarter.
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Operating Margin
Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Waste Management has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 17.2%. This isn't surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Waste Management's annual operating margin rose by 1.8 percentage points over the last five years, showing its efficiency has improved.
This quarter, Waste Management generated an operating profit margin of 18.7%, in line with the same quarter last year. This indicates the company's cost structure has recently been stable.
EPS
Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Waste Management's EPS grew at a decent 9% compounded annual growth rate over the last five years, higher than its 6.5% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Waste Management's earnings quality to better understand the drivers of its performance. As we mentioned earlier, Waste Management's operating margin was flat this quarter but expanded by 1.8 percentage points over the last five years. On top of that, its share count shrank by 5.7%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Waste Management, its two-year annual EPS growth of 11% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.
In Q2, Waste Management reported EPS at $1.69, up from $1.51 in the same quarter last year. Despite growing year on year, this print missed analysts' estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Waste Management to grow its earnings. Analysts are projecting its EPS of $6.30 in the last year to climb by 18.4% to $7.46.
Key Takeaways from Waste Management's Q2 Results
We struggled to find many strong positives in these results. Its EPS and revenue fell short of Wall Street's estimates, and its full-year guidance was unchanged. Overall, this was a mediocre quarter for Waste Management. The stock traded down 5.3% to $206 immediately following the results.
Waste Management may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.