Shares of waste collection and recycling industry leader Waste Management (WM -0.49%) were up 5% as of 1 p.m. ET Tuesday, according to data provided by S&P Global Market Intelligence.
In addition to outpacing analysts' expectations for the third quarter, Waste Management's leadership hinted at the likelihood of quickly rising free cash flows (FCF) over the next few years.
Waste Management's recent investments could start paying dividends
During Q3, the company grew its revenue by 8% while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 11%. Furthermore, Waste Management grew cash from operations (CFO) for the first three quarters of 2024 by 16% versus the same period in 2023.
This ballooning CFO sets the stage for a strong possibility of FCF rising over the next few years as Waste Management starts to reel in some of the capital expenditures (capex) it made on recent sustainability investments. Spending heavily on automation projects across its recycling facilities and the buildout of renewable natural gas (RNG) projects, the company's capex-to-sales ratio ballooned from 8% in 2014 to 15% today.
However, with 24 of its 39 planned automation undertakings complete and seven of its 20 planned RNG projects set to be running by year-end, Waste Management's capex should begin reverting closer to historic levels by 2026, bringing higher FCF.
CFO Devina Rankin touched on this point during the earnings call, explaining, "When you combine our solid waste growth with an increase in earnings contributions from sustainability projects and the expected benefits from adding Stericycle's business to our portfolio, we expect the year ahead to be one of standout performance."
Is Waste Management a buy?
Trading at 17 times CFO, Waste Management and its undeniably steady operations seem reasonably priced, considering the company's potential for higher cash generation over the next few years.
