As a waste management company that provides non-hazardous waste collection, recycling and disposal services to commercial, industrial, municipal and residential customers, Progressive Waste Solutions Ltd. (TSX:BIN)(NYSE:BIN) seems to me to be in the right business.
That is until we dig deeper and see that 2014 revenue declined versus 2013. Though the decline was marginal, it is a decline nevertheless. The company’s most recent quarter (Q2) also declined, a more pronounced decline of 4%. And with the company’s announcement of preliminary third-quarter results that are very disappointing, the stock is down big today.
The company expects revenue of $489 million in the quarter, a decline of 6.2%, as well as lower-than-expected EBITDA due to the impact of foreign exchange rates and higher-than-previously-expected operating costs in its western region.
From this, we as investors can and should take away a lesson. Here are three very important red flags that should have kept investors away from this stock. In the future, investors should pay attention to these warning signs before investing in a stock. Specifically, it is when two or more of these red flags exist that makes the stock a very risky proposition.
Declining financial metrics
Progressive Waste Solutions has been experiencing a stalling/declining top line recently. This is combined with the cost pressure the company is facing. But if we look back a few quarters, we can see the red flags in the revenue numbers as well as in the margin pressure experienced, which are not new issues.
Operating margins have declined steadily over the last few quarters from a high of almost 15% in the second quarter of 2014 to the latest quarter’s margin of just over 9%.
The company’s debt-to-total-capitalization ratio is a 58.4%, a heavy debt load to shoulder. Again, this on its own does not necessarily mean that investors should stay away from a company, but it is something to always consider because in combination with the other two red flags, it becomes a risky proposition.
In and of itself, a rich valuation is not necessarily a bad thing, although it does raise the risk profile of the investment. Before today’s fall, Progressive Waste Solutions was trading at 26 times 2014 EPS and almost 30 times 2015 EPS. And earnings during this period were already expected to decline by 14.5%.
These are very hefty valuation levels when we consider the two prior points that I have highlighted. Again, this is not a good combination.