Garbage collection: it’s the dirty work no one really wants to do.
However, for companies like Waste Connections (TSX: WCN)(NYSE: WCN), this business is extremely profitable. Some companies are better than others at turning a profit at picking up the trash. Waste Collections happens to be the best in the business.
Business model superiority provides a small moat
From a fundamentals standpoint, Waste Connections is the best in the business. This is a company that has provided investors with industry-leading metrics for quite some time. The company’s free cash flow margin of 12% and EBITDA margin of 30% are best in class. Accordingly, this is a company that has one of the best balance sheets in the sector. Additionally, Waste Connections’s growth profile remains superior to its peers as a result of its cash flow generation.
Waste Connections has grown organically, as well as via acquisition, over the years. The waste collection business is a fragmented one. Many small- to medium-sized enterprises hold regional market share across North America. Waste Connections has done a great job of acquiring a number of these smaller players to create synergies and improve the company’s overall margins. Today, Waste Connections serves over six million customers across North America. These include residential, industrial, and commercial clients.
These clients tend to be “sticky” with respect to the garbage collection service they use. This provides for higher margins, as the company isn’t worried about competitive price wars in its core markets. If such worries come up, acquiring the competition is one way to assuage such concerns.
Room for more acquisitions on the horizon
Given how fragmented the U.S. market is in particular, Waste Connections is in a good position to continue to grow its market share via acquisition. Accordingly, there’s a tremendous appetite for the sort of growth Waste Connections provides. This is reflected in the company’s valuation, which is certainly not cheap. The company is trading at approximately 160 times earnings and six times sales. Indeed, these valuation metrics suggest a rapid pace of consolidation over the medium to long term.
Bottom line
Waste Connections has an excellent defensive business model, with stable cash flows derived from multi-year contracts with its commercial and industrial clients with built-in price increases over time. The stickiness of its customer base, and the essential nature of its core business provides a very clear thesis for long-term growth.
This garbage collection company is an underappreciated growth gem on the TSX. For those looking to pick up shares of Waste Connections, I’d suggest doing so on dips moving forward. However, this is a stock that has always been priced at a premium, so more upside could be on the horizon from here.
