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Waste Connections (WCN) Rides on Buyouts Despite Debt Woes

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Waste Connections Inc. (WCN - Free Report) stock has rallied 11.1% on a year-to-date basis, outperforming 5.5% rise of the industry it belongs to.

 

The company is benefiting from continuous strength in solid waste pricing growth, exploration and production (E&P) waste activity and contributions from acquisitions.

Waste Connections reported strong second-quarter 2018 results, with earnings and revenues beating the Zacks Consensus Estimate. Adjusted earnings per share (EPS) of 65 cents surpassed the consensus mark by 2 cents and improved 18.2% year over year. Revenues of $1.24 billion beat the consensus mark by $0.2 billion and increased 5.4% year over year. The Zacks Consensus Estimate for third quarter EPS declined 2.9% over the past 60 days.

What’s Driving Waste Connections?

Waste Connections’ top line continues to grow with the help of acquisitions. In the first half of 2018, Waste Connections witnessed annualized revenues of approximately $175 million from acquisitions. Moreover, acquisitions contributed almost $1 billion of revenues in 2017, $1.27 billion in 2016 and $57.7 million in 2015. The company follows a combination of financial, market and management criteria to evaluate opportunities from acquisitions. Meanwhile, it is highly optimistic about “tuck-in” acquisition opportunities within its current and targeted market areas as these can help increase market share.

We appreciate Waste Connections’ focus on secondary and rural markets to garner a higher local market share, which would be difficult to attain in more competitive urban markets. Through its integrated solid waste services — which includes waste collection, transfer, disposal and recycling services — the company serves more than six million residential, commercial, industrial, and E&P customers in 40 states in the United States and six provinces in Canada.

With prime location of disposal sites within competitive markets, Waste Connections enjoys an optimal asset positioning, which helps it generate higher profitability. Considering the importance of costs associated with the transportation of waste to treatment and disposal sites, having disposal capacity close to the waste stream offer a competitive advantage.

We are also impressed with Waste Connections’ endeavors to reward its shareholders in forms of dividend payments and share repurchases. In the first half of 2018, Waste Connections paid $73.6 million of dividend and repurchased shares worth $42 million. Such moves indicate the company’s commitment to create value for shareholders and underline its confidence in its business.

Risks

Waste Connections’ balance sheet is highly leveraged. As of Jun 30, 2018, long-term debt was $3.79 billion while cash and cash equivalents were $145.8 million. Such a cash position implies that Waste Connections needs to generate an adequate amount of operating cash flow to pay its debt. Moreover, high debt may limit its future expansion and worsen its risk profile.

While delivering environmental and waste management services, Waste Connections remains exposed to multiple operational risks such as truck accidents, equipment defects, malfunctions and failures. Operating fueling stations, and landfill gas collection and control systems involves additional risks of fire, and explosion. Stringent environmental, health and safety laws have been hindering the company’s operations, and raising its operating costs. All these factors erode the profitability of the company and compress its margins.

Zacks Rank & Stocks to Consider

Currently, Waste Connections is a Zacks Rank #3 (Hold) stock.

Some better-ranked stocks in the broader Business Services sector are CRA International , FTI Consulting (FCN - Free Report) and NV5 Global (NVEE - Free Report) . While CRA International and FTI Consulting sport a Zacks Rank #1 (Strong Buy), NV5 Global carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

CRA International, FTI Consulting and NV5 Global have an impressive surprise history, with an average positive earnings surprise of 38.6%, 58.3% and 12.7%, respectively.

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