WM Q3 earnings show healthcare strength but core volume softness

What happened

Waste Management reported Q3 results with healthcare EBITDA up 33% and nine-month free cash flow rising over 42%, reflecting successful Stericycle integration and lower sustainability capex. However, waste volumes are slowing and fuel costs are pressuring margins, leading management to reaffirm 2026 guidance rather than raise it. The company's stock still trades at a premium, with P/E around 34.5x and EV/EBITDA near 17.3x, far above a conservative DCF value of $73 per share. The deep value master report maintains a POTENTIAL SELL stance, citing high leverage (net debt/EBITDA 3.64x) and execution risks in recycling, RNG, and healthcare. The healthcare improvement addresses one watch item, but valuation and volume trends keep the bias negative.

Implication

Longer-term, the healthcare segment's profitability trajectory and free cash flow strength are positive signals that could eventually support a higher rating if sustained without impairments. However, volume softness in the core collection business and elevated fuel costs may continue to pressure margins in coming quarters. The company's leverage remains high at 3.64x net debt/EBITDA, and share buybacks are paused until deleveraging, limiting near-term catalysts. Until the stock's multiple compresses to a level with a reasonable margin of safety, or until there is more evidence of successful integration and deleveraging, the risk/reward remains unfavorable. We would use any strength from positive news to reduce positions rather than add.

Thesis delta

No change to the overall POTENTIAL SELL thesis. The 33% healthcare EBITDA growth and 42% FCF increase are consistent with the watch item on Stericycle integration, but the slowdown in waste volumes and fuel cost pressure partially offset these positives. Valuation remains stretched with no meaningful margin of safety, so the recommendation stays to trim or avoid adding.