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Here's Why You Should Retain Waste Connections (WCN) Now

Zacks Equity Research

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 on by tough market conditions.

One such stock is Waste Connections, Inc. WCN, which has an expected long-term (three to five years) earnings per share growth rate of 9.4%. Moreover, earnings are expected to register 4% growth in 2020 and 13.5% in 2021.

Factors Driving Waste Connections

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. This decreases the company’s exposure to customer churn and helps improve financial returns. 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.

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The company enjoys optimal asset positioning as its disposal sites are 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 a disposal capacity close to the waste stream offers a competitive advantage.

Acquisitions act as a key growth catalyst. In 2019, the company completed the purchase of 21 individually immaterial non-hazardous solid waste collection, recycling, transfer and disposal businesses. The company completed 20 acquisitions in 2018, 14 in 2017 and 12 in 2016. Some of the notable acquisitions include American Disposal Services and certain affiliates, Groot Industries and Progressive Waste.

The company’s consistency in rewarding its shareholders not only boosts investor confidence but also positively impact earnings per share. In 2019, the company paid out $175.1 million of dividends. In 2018, it paid out $152.5 million of dividends and repurchased shares worth $58.9 million.

Risks

Despite the aforementioned positives, the company faces its share of headwinds. Waste Connections’ balance sheet is highly leveraged. As of Dec 31, 2019, long-term debt was $4.35 billion while cash and cash equivalents were $326.74 million. Higher debt may limit the company’s future expansion and worsen its risk profile.

The company’s revenues are highly seasonal in nature with first-quarter revenues being the lowest. While revenues rise in the second and third quarters, fourth-quarter revenues are lower than the prior two quarters. The expected revenue fluctuation between the highest and lowest quarters due to seasonality is around 12%.

The company remains exposed to multiple operational risks such as truck accidents, equipment defects, malfunctions and failures, while delivering environmental and waste management services. Operations in Canada expose it to risks associated with foreign currency exchange rate fluctuations and uncertainty from monetary devaluation.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader Zacks Business Services sector are CoreLogic CLGX, Booz Allen Hamilton BAH and Charles River Associates CRAI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term expected EPS (three to five years) growth rate for CoreLogic, Booz Allen Hamilton and Charles River Associates is 11%, 11.9% and 13%, respectively.

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Charles River Associates (CRAI) : Free Stock Analysis Report
 
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