WM.N-Waste Management, Inc. 4Q22 Accelerating Sustainability In..

Toni.Kaplan@morganstanley.comHil.Lee@morganstanley.comMORGAN STANLEY & CO. LLCToni KaplanEQUITY ANALYST+1 212 761-3620Hilary Lee, CFARESEARCH ASSOCIATE+1 212 761-2203Business & Education Services / United States of AmericaStock RatingEqual-weightIndustry ViewIn-LinePrice target$179.00Shr price, close (Feb 1, 2023)$154.41Mkt cap, curr (mm)$63,38652-Week Range$175.98-138.58Fiscal Year EndingFiscal Year Ending12/2212/2212/23e12/23e12/24e12/24e12/25e12/25eModelWare EPS ($)5.595.926.797.98Prior ModelWare EPS($)5.736.226.817.72P/E-26.122.719.4EPS ($)§5.716.146.808.02Div yld (%)-1.81.92.0Unless otherwise noted, all metrics are based on Morgan Stanley ModelWareframework§ = Consensus data is provided by Refinitiv Estimatese = Morgan Stanley Research estimatesQUARTERLY MODELWARE EPS ($)2023e2023e2023e2023e2024e2024e2024e2024eQuarterQuarter20222022PriorPriorCurrentCurrentPriorPriorCurrentCurrentQ11.291.471.291.591.51Q21.441.621.531.771.74Q31.561.601.671.761.88Q41.311.531.431.701.66e = Morgan Stanley Research estimates Stock RatingEqual-weight Industry ViewIn-Line Price Target$179.00Waste Management, Inc.Waste Management, Inc. || North America North America4Q22: Accelerating SustainabilityInvestmentsWM announced its plan to accelerate its sustainabilityinvestments in '23, leading to lower near-term FCF, but higherlong-term benefits. Volume trends in the quarter saw somesoftening. PT to $179 (from $177), maintain EW.WHAT'SCHANGED Waste Management, Inc. (WM.N)FromToPrice Target$177.00$179.00Impact on our views: WM's 4Q22 results were mixed with FCF 40% below MSe(which was below the midpoint of the prior guide of $350M) with ~50%explained by pulling forward capex spend. Further, given its acceleration insustainability investments, the '23 FCF guide was 34% below prior MSe and 23%below cons. While this was below expectations, these investments are profitable(RNG ~70% EBITDA margin), and management provided transparency on anannual basis for the investment spend and profitability through '26. This includesan incremental annual $500M of EBITDA in '26 from 20 RNG plants, and $240Mof annual incremental recycling EBITDA (and a total of $630M of FCF). We viewWM as the leading waste provider with regard to sustainability investments (seeBusiness & Education Services: ESG in Waste: New Horizons to Pursue (22 Jun2022).)4Q Top line trends: softer volumes, slight decel in price. 4Q22 rev growthdecelerated q/q to MSD% (from HSD% in 3Q22), 20 bps below MSe driven byvolumes, which were negative for the first time since 1Q21. Importantly,management noted softening volumes with commercial and industrial clients,which we believe is an indicator of slowing economic activity, though Jan volumeswere better than 4Q. Core price remained near record highs at 8.1% butdecelerated a modest 10bps q/q after accelerating sequentially the prior 4quarters.Following results, we incorporate the sustainability investments and benefitsinto our model leading our adj. EBITDA est to decrease for