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Why Should You Retain Waste Connections in Your Portfolio?

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A prudent investment decision involves buying stocks that have solid prospects and selling those that carry risks. At times, it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions.

Here we discuss about Waste Connections, Inc. (WCN - Free Report) , a stock with a Growth Score of B and an expected long-term earnings per share growth rate of 13.3%.

In the past six months, shares of the company have gained 9.3% compared with the 1.5% increase of the industry it belongs to.

 

We believe the stock has the potential to exceed expectations moving ahead. The reasons behind our optimism include the company’s benefits from acquisitions and strong hold in secondary and rural markets.

Let’s discuss them in detail.

Early Mover Advantage

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. This, in turn, decreases the company’s exposure to customer churn and helps improve financial returns. In fact, earlymover 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 for expanding customer base beyond the exclusive market territories.

Prime Location Advantage

With prime location of disposal sites within competitive markets, Waste Connections has optimal asset positioning to generate higher profitability. Given significant costs associated with the transportation of waste to treatment and disposal sites, having disposal capacity proximate to the waste stream offer a competitive advantage and serve as a barrier to entry. An experienced management team, decentralized operating strategy and financial strength are additional tailwinds.

Acquisitions Driving Growth

Waste Connections continues to grow with the help of acquisitions in both new and existing markets. It follows a strategic combination of financial, market and management criteria to evaluate opportunities from acquisitions. In new markets, the company uses its initial buyout as an operating base and seeks to strengthen the acquired operation's presence by providing additional services, adding customers and making “tuck-in” acquisitions of other waste companies in that market or adjacent markets.

Waste Connections remains highly optimistic about “tuck-in” acquisition opportunities within its current and targeted market areas as these can help increase market share. In 2017, the company completed 14 acquisitions for a net fair value of $562.2 million.

Zacks Rank and Stocks to Consider

Waste Connections currently carries a Zacks Rank #3 (Hold).Some better-ranked stocks in the broader Business Services sector include Mastercard Inc. (MA - Free Report) , FLEETCOR Technologies, Inc. (FLT - Free Report) and WEX Inc. (WEX - Free Report) . While Mastercard sports a Zacks Rank #1, FLEETCOR Technologies and WEX carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term expected earnings per share growth rate for Mastercard, FLEETCOR Technologies and WEX is 19%, 16.5% and 14.3%, respectively.

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