Waste Management Inc. (WM)_ Rising visibility on green capex and margin acceleration; Buy(1)

Key Data __________________________________ GS Forecast ________________________________ GS Factor Profile ____________________________ Source: Company data, Goldman Sachs Research estimates. See disclosures for details.   Revenue($mn)Old19,746.920,730.321,628.3-- EBITDA($mn)5,512.05,927.56,329.96,782.6 EBIT($mn)3,474.03,816.14,124.34,470.1  EPS($)Old5.736.126.80-- P/E(X)28.425.622.920.7 Dividendyield(%)1.61.71.71.7 Netdet/EBITDA(X)2.62.42.11.7  EPS($)1.301.321.551.66 WMrlativtoAmricasCovrag WMrlativtoAmricasMachinry&Div rsifi dIndustrials,InfrastructuGrowth FinancialReturnsMultipleIntegrated Prcntil20th40th60th80th100th WM was down 0.2% today following a -2% EBITDA miss on lower margins (recycling price headwinds). However, we come from away results positive on (i) EBITDA margin acceleration exiting 2023 (+140 bps), and (ii) building visibility on landfill gas earnings power as earnings cadence, free cash flow conversion, and offtake agreements are coming in in-line to ahead of our estimates. Whileguidance assumes a meaningful step-up in recycling prices from current levels ($70 per ton vs $47 today), this is balanced by what we view as a conservative pricing guide (5.5% collection and disposal yield vs. our estimate of 7.9% in 1Q2023E). We note three key takefrom the quarter. aways 1. Visibility on landfill gas earnings stream continuing to build and pricing has remained strong despite the pullback in natural gas prices. WM introduced an incremental landfill gas EBITDA ramp ahead of our forecasts (Exhibit 1) with the delta driven by WM increasing its project pipeline 18% this quarter. WM estimates that 40% of 2023 landfill gas to RNG volumes will be contracted at a fixed price, and commented that offtake pricing has not pulled back after the recent decline in Henry Hub prices. As outlined in our August, 2022 deep dive, we believe the strength in offtake agreements is driven by a >100 mn MMBtu landfill gas demand market. We estimate long-term offtake pricing in the low $20s per MMBtu today (~25% IRR) compared to spot market pricing of ~$25 per MMBtu and WM’s pricing assumptions of $26 per MMBtu. WM disclosed that 55% of its gas generation remains to be monetized. WM12mPrieTarget:$196.00Prie:$154.41Upside:26.9% Waste Management Inc. (WM) Rising visibility on green capex and margin acceleration; Buy1 February 2023 | 8:25PM EST Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors shoul