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Waste Connections (WCN) Upgraded to Buy on Solid Q2 Results

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On Jul 31, Zacks Investment Research upgraded Waste Connections, Inc. (WCN - Free Report) to a Zacks Rank #2 (Buy) from a Zacks Rank #3 (Hold).  

The upgrade can primarily be attributed to the company’s impressive second-quarter 2017 results.

Waste Connections has outperformed the industry in the last three months with an average return of 6% compared with 1.2% gain for the latter. In the second quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 1.72%. Revenues improved to $1,176.6 million, which exceeded the Zacks Consensus Estimate of $1,150 million.  Owing to solid results, the company raised its guidance for 2017. It currently expects revenues of approximately $4.57 billion compared with its previous guidance of roughly $4.450 billion. The company expects  adjusted free cash flow to be around $750 million.

Waste Connections typically targets secondary and rural markets to garner a higher local market share, which would be difficult to attain in more competitive urban markets. In certain niche markets, like E&P waste treatment and disposal, early mover advantage in certain rural basins play a key role in improving market positioning and generating higher financial returns, given the limited availability of existing third-party-owned waste disposal alternatives.

The company focuses on increasing market penetration and offering additional services to capitalize on future drilling opportunities in those areas. Waste Connections also aims to leverage its franchise-based platforms to expand customer base beyond the exclusive market territories. As customers are added in the existing markets, revenue per routed truck rises, which increases collection efficiencies and profitability.

However, the volatility in crude oil prices is expected to impair profitability and creditworthiness of Waste Connections and adversely affect the level of investment and linear feet drilled in the basins where it operates. It may further impact the ability of E&P companies to access capital on economically advantageous terms. This, in turn, is likely to reduce the demand for its services, thereby affecting both its top line and bottom line.

Other Stocks to Consider

Other stocks in the same space worth considering include ABM Industries Incorporated (ABM - Free Report) , CRA International, Inc. (CRAI - Free Report) and Gartner, Inc. (IT - Free Report) . CRA International sports a Zacks Rank #1 (Strong Buy), while ABM Industries and Gartner both carry the same Zacks Rank as Waste Connections. You can see the complete list of today’s Zacks #1 Rank stocks here.

ABM Industries is currently trading at a forward P/E of 23.3x.

CRA International is currently trading at a forward P/E of 27.4x.

Gartner is currently trading at a forward P/E of 36.9x.

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