Waste Management's Q3 Miss Punctures Pricing Power Thesis

The Pricing Power Mirage#

When Waste Management reported third-quarter 2025 earnings on October 27, the result delivered a jarring contradiction to the confidence narrative that had dominated analysis going into the release. The company reported earnings per share of $1.98, missing the consensus estimate of $2.01 by 1.49 percentage points—a modest shortfall that nonetheless punctured the widely held thesis that pricing discipline would insulate WM from mounting cost pressures. Revenue came in at $6.44 billion, shy of the expected $6.48 billion, suggesting that even the top line proved vulnerable to execution missteps. The miss landed just four days after a previous analysis had positioned the very earnings release as a defining test of WM's ability to sustain the pricing power that has underwritten both the Gates Foundation's $7.4 billion stake and two decades of consecutive dividend growth. That test, it appears, has been failed—at least for this quarter. The stock dropped sharply after hours, and the narrative foundation supporting the company's premium valuation has begun to shift.

The paradox embedded in WM's Q3 results illuminates the core challenge now facing the company and its institutional investors. Revenue expanded 14.8 per cent year-over-year, from $5.61 billion in the prior-year quarter to $6.44 billion in Q3 2025—a growth rate that would ordinarily be considered robust for a mature waste hauler. Yet despite this substantial topline expansion, earnings per share grew only 1.02 per cent, from $1.96 to $1.98. This divergence is the signature of margin compression, and it tells an unwelcome story: the cost structure of WM has been rising faster than the company's ability to pass those costs through to customers via price increases. Labour costs, particularly in regions governed by collective bargaining agreements, have accelerated. Recycling commodity prices—whilst volatile—have headwinds that management flagged in prior commentary. Fuel costs remain elevated. Collectively, these pressures appear to have overwhelmed the modest pricing power that management had repeatedly assured investors remained intact.

To understand the nature of WM's execution challenge, it is useful to examine the company's track record over recent quarters. In the second quarter of 2025, WM delivered an upside surprise, reporting earnings of $1.92 per share against a consensus estimate of $1.89, a beat of 1.59 per cent. Management commentary at that time emphasised the success of core pricing initiatives—cumulative price increases totalling 8 to 10 per cent over the prior three years, which management positioned as evidence of genuine pricing power rather than passive cost pass-through. Yet the Q3 miss suggests that either the sustainability of that pricing power has deteriorated, or that the company's ability to absorb cost inflation whilst maintaining margins has been overstated. The most likely explanation is a combination of both factors: pricing discipline may be holding in certain customer segments, particularly large commercial accounts where switching costs are high, but margin compression is occurring in more competitive segments where customers are increasingly price-sensitive or where WM faces pressure from smaller, lower-cost competitors leveraging digital-first collection models.

The Dividend Growth Thesis Under Strain#

For the Gates Foundation and other long-term institutional shareholders, the immediate question is whether the Q3 miss signals a broader deterioration in WM's ability to sustain its twenty-one-year dividend growth streak. This concern, whilst understandable, may be overstated in the short term. WM maintains a payout ratio of roughly 46 per cent of earnings, a conservative figure that leaves ample room for dividend increases even in the face of moderating earnings growth. More importantly, the company's free cash flow generation—the true barometer of dividend sustainability—appears to remain on track. Following second-quarter results in July, WM raised its full-year free cash flow guidance to a midpoint of $2.85 billion, a figure that suggests roughly $7.10 per share in free cash flow generation. Against the current annual dividend commitment of approximately $3.30 per share, this implies a free-cash-flow-based payout ratio of 46 per cent, again leaving comfortable headroom for dividend growth.

The Q3 miss does not appear to have prompted management to revise this guidance, which would suggest that operational challenges reflected in the earnings miss may be transitory or manageable within the broader context of full-year cash generation. The dividend remains well-protected not by earnings stability but by the company's fortress balance sheet and disciplined capital allocation framework. Investors may need to accept slower dividend growth—perhaps in the 3-4 per cent range rather than the historical 5-7 per cent pace—but the twenty-one-year streak of consecutive annual increases is unlikely to be threatened. For institutional holders evaluating dividend durability, WM remains safer than peers facing greater structural headwinds, though the trajectory has shifted from growth acceleration to measured consolidation.

Competitive Intensity and the Erosion of Pricing Power#

WM does not compete in isolation. The waste removal services industry, of which WM is the largest player by scale, is ranked in the bottom 36 per cent of Zacks' 250-plus industries by fundamental momentum—a decidedly unfavourable position relative to the broader market. Republic Services (RPS, the second-largest competitor, maintains comparable scale and has historically matched WM in pricing discipline, but the competitive landscape has shifted in recent years. The rise of digital-enabled, smaller waste haulers operating in specific geographic markets or customer segments has fragmented pricing power, particularly in price-sensitive commercial and roll-off segments. WM has invested heavily in customer analytics and digital engagement to counter this trend, but the Q3 miss suggests that these investments have not yet fully offset the erosion of pricing discipline in competitive accounts.

The company's strategic deployment of targeted retention pricing for at-risk accounts is a rational response to competition, but it inherently means accepting lower margins on business that might otherwise have migrated to competitors. This trade-off may be sound strategically—retaining revenue at lower margin beats losing the account entirely—but it necessarily dampens earnings growth relative to topline expansion. The shift from uniform pricing discipline to segmented, account-specific pricing strategies represents a meaningful strategic pivot, one that prioritises revenue stability over earnings growth. For investors accustomed to WM as a pricing power story, this recalibration marks the maturation of a competitive dynamic that was once definitively in the company's favour.

Outlook and Near-Term Catalysts#

The Path to Restored Investor Confidence#

The Q3 earnings miss has forced a recalibration of expectations for WM and its ability to sustain the pricing power that has been central to the company's investment thesis for the past two decades. The immediate catalyst will be management's commentary on the October 28 conference call, where investors will listen intently for evidence that the pricing pressure witnessed in Q3 is transitory or manageable. If management signals confidence that cost pressures will abate in the fourth quarter, or that pricing discipline is re-establishing itself, the narrative may stabilise and valuation pressure may ease. Conversely, if commentary suggests that competitive intensity is persistent or that pricing power remains elusive, a more significant repricing of expectations is likely.

The Gates Foundation and other long-term holders of WM will take comfort from the company's strong free cash flow generation and conservative capital structure, which together provide ample capacity to sustain the dividend through a period of earnings moderation. However, the aspiration of consistent double-digit percentage earnings growth per annum—a hallmark of WM's franchise in prior decades—appears to have receded into the medium-term distance. The Q3 results signal a transition from earnings expansion to earnings stabilisation, a shift that may prove enduring rather than transitory. For equity analysts and institutional investors, the task now becomes reconceptualising WM as a yield-and-stability story rather than a growth narrative, a reframing that will influence both target prices and portfolio positioning.

The Analyst Revision Cycle and 2026 Outlook#

Zacks Investment Research has assigned WM a Rank of #3 (Hold) on the basis of mixed earnings estimate revision trends prior to the Q3 release. In the days and weeks ahead, the Q3 miss will likely trigger downward revisions to estimates for Q4 2025 and the full 2026 fiscal year. The current consensus for Q4 stands at $2.00 per share in earnings, a figure that may prove optimistic if margin compression persists. Similarly, full-year 2025 consensus of $7.55 in earnings may require downward adjustment, potentially settling at $7.40-$7.50. The critical question for the fourth quarter will be whether management commentary on the earnings call provides evidence that pricing discipline is stabilising or whether cost pressures continue to outpace pricing realisations.

If the former trajectory prevails, the near-term outlook may stabilise and the dividend growth narrative can persist at a more moderate pace. If the latter, expectations for 2026 earnings growth may need to reset substantially lower, and the valuation multiple commanding WM stock may contract accordingly. The fourth-quarter earnings release, due in early 2026, will provide the critical evidence needed to determine whether this quarter's miss represents a cyclical inflection or a structural shift in the company's competitive positioning. Management's ability to articulate a credible path to pricing discipline restoration—whether through operational efficiency gains, selective customer portfolio optimisation, or cost control measures—will be essential for restoring institutional confidence.

Risks: Recession, Commodities, and Regulatory Headwinds#

Whilst the immediate challenge facing WM is operational—maintaining margins in the face of cost inflation and competitive pricing pressure—several medium-term risks threaten the dividend and capital allocation framework. On the risk side, a prolonged recession would compress waste volumes and customer purchasing power, potentially forcing WM to concede pricing to retain revenue. Similarly, a sustained deterioration in recycling commodity prices would further compress margins in the company's higher-margin processing segment, much as occurred in prior commodity downturns. Environmental regulation and the push toward circular economy models present both risks and opportunities: the landfill segment, which contributed approximately $1.446 billion of second-quarter revenues, or roughly 22.5 per cent of total topline, could face pressure if future regulation mandates higher recycling rates or imposes landfill taxes.

Conversely, WM's strategic investments in organic waste processing and energy recovery—the renewable energy segment generated $115 million in Q2 revenue—position the company to capture new service opportunities if regulatory drivers favour these solutions. The company's mature asset base and disciplined capital expenditure—capex-to-revenue ratios of 10 to 12 per cent, well below industry averages—provide financial flexibility to invest in these transition areas without straining cash flow. Yet the Q3 miss suggests that management's bandwidth for long-term strategic positioning may be consumed by the near-term challenge of restoring margin discipline. For institutional investors like the Gates Foundation, these risks are real but not immediately imminently threatening, given the essential nature of waste services and the company's operational track record. However, the Q3 miss has demonstrated that pricing power—a cornerstone of the company's competitive positioning—is less durable than pre-earnings commentary had suggested.