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Waste Connections (WCN) Rides on Buyouts, High Debt a Concern
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Waste Connections Inc. (WCN - Free Report) stock has rallied 8.5% on a year-to-date basis, outperforming 3.9% rise of the industry it belongs to.
Waste Connections reported strong third-quarter 2018 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Adjusted earnings per share of 69 cents surpassed the consensus estimate by a penny and improved 15% year over year. Revenues of $1.28 billion outpaced the consensus mark by $11 million and increased 6.2% on a year-over-year basis.
The company has an impressive earnings surprise history, having outpaced estimates in three of the last four quarters. It delivered average four-quarter positive earnings surprise of 2.7%. Over the past 30 days, the Zacks Consensus Estimate for fourth-quarter earnings has been revised 1.7% upward.
What’s Driving Waste Connections?
Waste Connections continues to grow its top line with the help of acquisitions in both new and existing markets. In the first nine months of 2018, the company completed the purchase of 15 individually immaterial non-hazardous solid waste collection, recycling, transfer and disposal businesses.
We appreciate Waste Connections’ focus on secondary and rural markets to garner a higher local market share, which will be difficult to attain in more competitive urban markets. This decreases the company’s exposure to customer churn and helps improve financial returns.
Waste Connections enjoys optimal asset positioning as its disposal sites are located at prime locations, 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 offers a competitive advantage.
We are also impressed with Waste Connections’ endeavors to reward its shareholders with dividend payments and share repurchases. In the first nine months of 2018, Waste Connections paid $110.44 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 Sep 30, 2018, long-term debt was $3.90 billion while cash and cash equivalents were $244.39 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.
Stringent environmental and health and safety laws have been hindering the company’s operations and raising its operating costs. Revenues are highly seasonal in nature with the lowest in the first quarter. The expected revenue fluctuation between the highest and lowest quarters is roughly 10%. Seasonality lowers predictably in revenue generation and increase operating risks.
A few better-ranked stocks in the broader Business Services sector include Paychex, Inc. (PAYX - Free Report) , Genpact Limited (G - Free Report) and WEX Inc. (WEX - Free Report) , each carrying a Zacks Rank #2 (Buy). The long-term expected EPS (three to five years) growth rate for Paychex, Genpact and WEX is 8.5%, 10% and 15%, respectively.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
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Waste Connections (WCN) Rides on Buyouts, High Debt a Concern
Waste Connections Inc. (WCN - Free Report) stock has rallied 8.5% on a year-to-date basis, outperforming 3.9% rise of the industry it belongs to.
Waste Connections reported strong third-quarter 2018 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Adjusted earnings per share of 69 cents surpassed the consensus estimate by a penny and improved 15% year over year. Revenues of $1.28 billion outpaced the consensus mark by $11 million and increased 6.2% on a year-over-year basis.
The company has an impressive earnings surprise history, having outpaced estimates in three of the last four quarters. It delivered average four-quarter positive earnings surprise of 2.7%. Over the past 30 days, the Zacks Consensus Estimate for fourth-quarter earnings has been revised 1.7% upward.
What’s Driving Waste Connections?
Waste Connections continues to grow its top line with the help of acquisitions in both new and existing markets. In the first nine months of 2018, the company completed the purchase of 15 individually immaterial non-hazardous solid waste collection, recycling, transfer and disposal businesses.
We appreciate Waste Connections’ focus on secondary and rural markets to garner a higher local market share, which will be difficult to attain in more competitive urban markets. This decreases the company’s exposure to customer churn and helps improve financial returns.
Waste Connections enjoys optimal asset positioning as its disposal sites are located at prime locations, 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 offers a competitive advantage.
We are also impressed with Waste Connections’ endeavors to reward its shareholders with dividend payments and share repurchases. In the first nine months of 2018, Waste Connections paid $110.44 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 Sep 30, 2018, long-term debt was $3.90 billion while cash and cash equivalents were $244.39 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.
Stringent environmental and health and safety laws have been hindering the company’s operations and raising its operating costs. Revenues are highly seasonal in nature with the lowest in the first quarter. The expected revenue fluctuation between the highest and lowest quarters is roughly 10%. Seasonality lowers predictably in revenue generation and increase operating risks.
Zacks Rank & Stocks to Consider
Currently, Waste Connections is a Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
A few better-ranked stocks in the broader Business Services sector include Paychex, Inc. (PAYX - Free Report) , Genpact Limited (G - Free Report) and WEX Inc. (WEX - Free Report) , each carrying a Zacks Rank #2 (Buy). The long-term expected EPS (three to five years) growth rate for Paychex, Genpact and WEX is 8.5%, 10% and 15%, respectively.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Click here for the 6 trades >>