The Motley Fool

Why Waste Connections (TSX:WCN) Is a Buy After its Impressive 3rd-Quarter Earnings

Image source: Getty Images

On October 28, Waste Connections (TSX:WCN)(NYSE:WCN) reported an impressive third-quarter performance, beating both analysts’ top- and bottom-line expectations. Its revenue came in at $1.39 billion against analysts’ expectation of $1.38 billion, while its adjusted EPS stood at $0.72, well above the expected $0.66. Meanwhile, let’s look at the company’s third-quarter performance in more detail.

A sequential improvement in revenue

Waste Connections’s third-quarter revenue showed significant improvement from its second quarter, as the economic activities began to improve after the lockdown. The improvement in the solid waste volumes and higher recovered commodity values drove the company’s top line.

However, year over year, the company’s revenue was still down 1.6% due to lower solid waste volumes and weaker E&P (exploration and production) activities. Year over year, the solid waste volumes declined by 5.7%, which was partially offset by favourable pricing of 3.7%. The company’s revenue collection from E&P activities fell 64% year over year due to lower drilling activity.

Better-than-expected EBITDA margin

Waste Connections has reported an adjusted EBITDA of 432.6 million for the quarter, which represented an EBITDA margin of 31.1%, which was 0.4% higher than the company’s guidance. Better-than-expected revenue and higher recovered commodity values drove the company’s EBITDA margin.

Meanwhile, year over year, the company’s adjusted EBITDA margin was down 0.3%, as lower E&P waste activities and pandemic-related expenses more than offset an improvement in the solid waste segment.

For the quarter, the company has posted an EPS of $0.60. However, removing special items, its adjusted EPS came in at $0.72, which was marginally lower than its previous year’s quarter of $0.73.

Liquidity and dividends

For the first nine months, the company has generated free cash flows of $778 million, representing 19.2% of its total revenue. It is also an improvement of $15.5 million from its previous year. Meanwhile, the company’s liquidity at the end of the quarter stood at $2 billion, with $859 million of cash and cash equivalents. So, the company has ample liquidity to pay out its dividends and also fund its acquisitions.

On Wednesday, the company’s board had declared a 10.8% increase in its quarterly dividend to US$0.205 per share, which represented a 10th consecutive year of double-digit growth. The strong cash flows have allowed the company to raise its dividends. Waste Connections’s dividend yield currently stands at 0.8%, which is on the lower side. However, the company’s dividends are still lower than 25% of its adjusted free cash flow. So, the company has room to increase its dividends.

Outlook

The company’s fourth-quarter guidance was a letdown. The management expects its revenue for the fourth quarter to be at $1.335 billion, representing a year-over-year fall of 2%. The decline of 6% in its solid waste’s volumes could more than offset favourable pricing of 4% to lower its revenue.

Although the company’s volumes have not witnessed any decline, the management was cautious in its guidance, given the concerns over additional shutdowns or restrictions amid the rising COVID-19 infections. The company’s adjusted EBITDA could come in at $400 million compared to $419 million in the previous year’s quarter.

However, Waste Connections’s long-term growth prospects remain intact. Since the beginning of this year, Waste Connections has signed or closed 16 acquisitions, which will add $135 million in annualized revenue. The company also has ample liquidity to fund future acquisitions.

Bottom line

Amid the broader equity markets’ weakness, Waste Connections’s stock has declined by close to 5% this month. Given the company’s growth prospects, higher margins, and strong liquidity, I believe investors with a long-term horizon should buy the stock for superior returns.

For similar wealth-creating ideas, check out the following report.

Motley Fool Canada Makes 5G Buy Alert

5G is one of the greatest arrivals in technology since the birth of the internet. We could see plenty of new wealth-building opportunities in 2020 that would potentially dwarf any that came before them.

5G has the potential to radically change our lives and society as we know it, but if you’re an investor, the implications are even greater — and potentially much more lucrative.

To learn more about it and its revolutionary potential to change the industry — and potentially your bank account — click on the link below to get the full scoop.

Learn More Today!

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.