Trimming Our Price Target on a Two-Rated Position

* We are dialing back our Waste Management price target, reiterating our Two rating.

* Our revised target reflects margin headwinds that will slow the pace of EPS gains in the coming quarters.

* We continue to see WM's non-residential business improving as the Fed embarks on its eventual rate-cutting cycle.

* There's a level where we would entertain picking up additional WM shares.

Following the post-earnings drop in shares of Waste Management WM, reflecting the company narrowly missing June-quarter consensus expectations, we are trimming our price target to $220 from $230. The company has continued to reap the margin benefits of pricing and expanding automation across its footprint, things that should continue. However, the reasons behind our reduced target stem from revelations made during the earnings call that suggest not as much of those benefits will be dropping to the company's bottom line in the coming quarters.

Management’s comments included that it completed $750 million in nip and tuck acquisitions through the first seven months of this year. Waste is a natural consolidator for its industry, but that level of activity was a bit of a surprise. Granted, the team is a well-oiled machine of operators and will eventually bring margins at those acquired businesses up to Waste levels, but near-term they will be a drag on overall margins. In reviewing the tone of its end markets, management said it is seeing softer Industrial volumes, which carry margins above the corporate average. Softer volumes for that end market are not surprising given recent manufacturing PMI reports.

What was a little surprising, though, was Waste saying that it will suspend its share repurchases as it looks to complete the announced acquisition of Stericycle later this year. While the management team termed this move as “temporary,” the program is not expected to be reinstalled until Waste’s debt levels get back in line with normalized levels. That’s expected to take about 24 months, but we suspect its return could be sooner if Waste disposes of any assets.

We estimate that during H1 2024, Waste’s buyback efforts added $0.05 per share to its bottom line – a modest contributor. While we don’t bake share-repurchase programs into our forward thinking, some do, and they will need to re-jigger their EPS expectations for H2 2024 and ensuing quarters.

The net sum of the above means slower-than-expected EPS prospects, but this period of digestion, which will include Stericycle in 2025, doesn’t change the company’s long-term margin profile potential. We continue to favor its sticky residential business and prospects for further price increases. In line with our thinking for United Rentals URI, Vulcan Materials VMC, and Builders FirstSource BLDR, as the Fed embarks on the eventual rate-cutting cycle, better volumes for Waste’s non-residential business should help improve its overall margin profile.

In terms of WM shares, we are likely to see some additional pressure on them Friday as Wall Street EPS estimates and price targets are trimmed. Should either those reductions or a larger market pullback bring WM closer to the $192-$193 level, that would give WM enough upside potential for the portfolio to consider picking up some additional shares and possibly revisiting our Two rating.

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At the time of publication, TheStreet Pro Portfolio was long WM, URI, VMC and BLDR.