Key Takeaways:
Waste Management delivered a strong Q2 2025, beating consensus estimates and reaffirming its full-year EBITDA guidance of $7.475-$7.625 billion, showcasing robust execution in its core and renewable energy segments.
The company's strategic growth initiatives, including a $3 billion investment in Renewable Natural Gas (RNG) and new recycling facilities, are on track to add $800 million in annual operating EBITDA by 2027.
While the integration of Stericycle (now WMHS) and commodity price volatility present key risks, the core business benefits from an oligopoly-like market structure and an unreplicable landfill network, driving a high 71% internalization rate.
In an environment of shifting economic signals, a company that can demonstrate pricing power and execute on long-term growth projects warrants close attention. Waste Management’s (WM) recent Q2 2025 results did just that, providing a clear illustration of operational strength. The quarter not only surpassed expectations but also saw management raise its full-year Free Cash Flow outlook to $2.8-$2.9 billion. My analysis indicates that while WM’s defensive, moated business provides a stable foundation, its future valuation hinges critically on the successful execution of its ambitious growth platforms in renewable energy and healthcare solutions. For investors, the central question is whether these new ventures can propel margins and earnings growth to justify the current premium valuation, and if they can continue to outperform the S&P500 as they have done the last 10 years.
The Bull Case
My positive thesis on Waste Management is anchored by its unparalleled competitive position and its clear, multi-faceted strategy for internal growth. The company’s ownership of North America's largest landfill network is its foundational advantage. This asset is nearly impossible to replicate due to strict regulations, creating immense barriers to entry. It allows WM to achieve a high internalization rate—71% in Q2—which is a significant increase from historical levels and enables the company to capture more margin. This structural advantage is complemented by disciplined pricing in an industry that has consolidated toward an oligopoly. With a core price increase of 6.4% in the last quarter and industry-wide targets of pricing 200 basis points above CPI, the model for steady revenue growth is firmly in place.
Looking forward, the growth story is compelling. I see the investment in renewables as a significant value driver. The company's $3 billion capital deployment into 20 new RNG facilities is projected to add $510 million in operating EBITDA by 2026 alone. This was evident in Q2, where the Renewable Energy segment’s EBITDA surged by $26 million year-over-year.
Furthermore, the acquisition of Stericycle, now WM Healthcare Solutions (WMHS), offers substantial synergy potential. Management is targeting the high end of its $80-$100 million synergy goal for 2025 and aims for $300 million by 2027. If WM can successfully reduce WMHS SG&A from over 20% toward its legacy business level of 10%, the margin uplift will be significant. The combination of these initiatives supports a path toward high single-digit internal revenue growth and could accelerate Adjusted EBITDA margins to approximately 33% by 2028, driving an estimated ~17% EPS CAGR over the 2024-2028 period. This level of growth, paired with a leading 12% ROIC, makes a powerful case for investment.
The Bear Case
Despite the structural advantages, I see several risks that could impede performance. The most immediate is integration risk associated with the large-scale Stericycle acquisition. Any operational missteps or failures to achieve the aggressive synergy targets could pressure earnings and lead to a contraction in WM’s valuation multiples, which currently stand at a forward P/E of 29.4 - 31.5x.
Second, the company remains exposed to commodity price volatility. While the core landfill business is insulated, the recycling segment is not. Management has already lowered its revenue forecast partly due to a revised recycled commodity price assumption of $80/ton, which creates a $10-$15 million EBITDA headwind. A further decline in these prices would directly impact profitability.
Third, the ambitious growth projects in RNG and automated recycling facilities carry inherent execution risk. Delays or cost overruns could postpone the anticipated EBITDA and FCF contributions, disappointing investor expectations. Finally, the business is not immune to macroeconomic pressures. Volume growth is closely tied to US GDP and housing starts, meaning a softer economic environment could present a headwind. Labor costs, which represent about 17% of revenue, are another persistent risk; higher-than-expected wage inflation could erode margins if not fully offset by pricing and efficiency gains.
Final Take
My analysis concludes that Waste Management’s investment case presents a compelling balance of defensive stability and aggressive growth. The company's core collection and disposal business, protected by a deep competitive moat, generates predictable cash flow and supports shareholder returns. The primary determinant of future stock performance will be management’s ability to execute on its two key growth pillars: the RNG build-out and the integration of WMHS. While risks related to execution, commodity prices, and macroeconomic softness are tangible, I believe the company's dominant market position and disciplined strategy provide a strong foundation to achieve its long-term financial targets. And just for context - this is one of my biggest overweights in my portfolio and a core holding since many years.
What are your thoughts? Do you believe the potential rewards from the RNG and healthcare initiatives outweigh the integration and execution risks?
Best,
Capdrift
Disclaimer: The information in this newsletter is for educational purposes only and is not financial advice. Please conduct your own research before making any investment decisions.