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Why Waste Connections (TSX:WCN) Is a Buy in This Volatile Market

Cogs turning against each other
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The equity markets are under pressure this month amid the uncertainty over the United States presidential elections, rising COVID-19 infections across the world, and signs of a slowdown in the economy. Meanwhile, no one knows how long or deep this correction could be.

So, investors should consider buying defensive stocks, such as Waste Connections (TSX:WCN)(NYSE:WCN), which are immune to economic downturns. The company, which is involved in the collection, transfer, and disposal of non-hazardous wastes, is up 3.3% for this month, while the S&P/TSX Composite Index is down 4.2%.

Given its defensive business model, aggressive expansion strategy, and consistently strong performance, I think the downward risks for the company are limited. Meanwhile, let’s look at its performance over the recent years and its growth prospects.

Impressive performance over the last five years

Waste Connections has delivered consistent performance over the years. It has grown its revenue from US$2.12 billion in 2015 to US$5.39 billion by 2019 at a CAGR of over 26%. Its strong underlining business and acquisitions drove the company’s revenue. In 2019, the company had acquired 21 companies, while it had completed 20 and 14 acquisitions in 2018 and 2017, respectively.

Generally, acquisitions tend to come at hefty premiums. However, the company has maintained its profitability with its EBITDA margin staying above 31% for the last five years. The company targets rural and secondary markets, which helps the company acquire significant market share and maintain higher margins. It focuses on having its disposal sites within the markets it tends to operate, which reduces its transportation costs, thus supporting its margins.

Meanwhile, the pandemic-infused lockdown weighed on the company’s financials in its recently completed second quarter. Its top line declined by 4.7%, while its adjusted EBITDA margin declined from 32.6% in the previous year’s quarter to 30.2%. However, the company’s volumes showed significant improvement in July, with the rise in economic activities after the lockdown.

Liquidity and dividends

Despite the slowdown, the company generated over US$750 million of cash from its operating activities in the first two quarters of this year. At the end of the second quarter, the company’s cash and cash equivalents stood at over US$790 million, while it also has access to over US$1.2 billion of credit. So, the company has ample liquidity to fund its future acquisitions.

The company also pays quarterly dividends. In July, the company had declared quarterly dividends of $0.185 per share at an annualized payout of $0.74 per share. So, the company’s dividend yield stands at 0.6%, which is on the lower side.

Outlook

As of June 30, Waste Connections owned 82 landfills, while operating 10 others through various agreements. Meanwhile, one site is still in the developmental stage. The average remaining life for these sites stands at 28 years. But, with the necessary permissions, the average remaining life could be increased to 31 years.

Meanwhile, the company has completed seven acquisitions this year, which could add US$60 million of revenue to the company every year. Also, the company is working on completing the acquisition of another collection and recycling company, which could contribute an additional US$40 million of revenue every year. So, the company’s growth prospects look healthy.

Bottom line

Currently, the company’s forward price-to-earnings multiple stands at 37, which looks expensive. However, given its recession-proof business model, strong growth prospects, higher margins, and stable cash flows, I am bullish on the company.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Rajiv Nanjapla has no position in any of the stocks mentioned.

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