Waste Connections Benefits From Acquisitions Amid High Debt

Waste Connections Inc. (NYSE:WCN) is benefiting from strategic acquisitions. Its focus on secondary and rural markets to garner a higher local market share is appreciable.

The company delivered impressive third-quarter 2019 results, with earnings and revenues beating the Zacks Consensus Estimate. Adjusted earnings of 73 cents per share beat the consensus estimate by 1.4% and increased 5.8% year over year. Revenues of $1.41 billion beat the consensus mark by 0.5% and improved 10.2% year over year.

Waste Connections 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%.

What’s Driving Waste Connections?

Waste Connections is bolstering its stake in the solid waste industry through strategic acquisitions. In the first nine months of 2019, the company completed the purchase of 10 individually immaterial non-hazardous solid waste collection, recycling, transfer and disposal businesses. Previously, the company completed 20 acquisitions in 2018, 14 in 2017, 12 in 2016 and 14 in 2015. Some of the notable acquisitions include American Disposal Services and certain affiliates, Groot Industries and Progressive (NYSE:PGR) Waste.

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 disposal capacity close to the waste stream offers a competitive advantage.

We also appreciate the company’s 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 Waste Connections’ exposure to customer churn and improves financial returns.

We are also impressed with Waste Connections’ consistent endeavorsto reward its shareholders in the form of dividend payouts and share repurchases. During the first nine months of 2019, the company paid out $126.35 million of dividend. In 2018, the company paid out $152.5 million of dividend and repurchased shares worth $58.9 million.

Risks

In spite of significant growth prospects, Waste Connections is not free from headwinds. The company has a debt-laden balance sheet. As of Sep 30, 2019, long-term debt was $4.04 billion while cash and cash equivalents were $303.78 million. High debt may limit its future expansion and worsen risk profile.

Stringent environmental and health and safety laws have been hindering the company’s operations and raising its operating costs. Its revenues are highly seasonal in nature with the first quarter recording the lowest revenues. While revenues increase 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%. Thus, seasonality lowers predictability in revenue generation and increases operating risks.

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 Global Payments (NYSE:GPN) , Mastercard (NYSE:MA) and Cardtronics (NASDAQ:CATM) . While Global Payments and Cardtronics sport a Zacks Rank #1 (Strong Buy), Mastercard carries a Zacks Rank #2 (Buy).

Long-term expected EPS (three to five years) growth rate for Global Payments, Mastercard and Cardtronics is 17%, 15.9% and 4%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

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