While the broader markets have staged a stellar comeback in 2023, the threat of a recession looms large over investors. Economists expect the Canadian markets to enter a recession by the end of 2023 due to interest rate hikes, which, in turn, results in a higher cost of debt, a tepid lending environment, and lower consumer spending.
So, it makes sense to identify quality companies that have the potential to generate cash flows and profits across business cycles. One such recession-resistant stock on the TSX is Waste Connections (TSX:WCN). Let’s see why.
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What does Waste Connections do?
A solid waste services company, Waste Connections (TSX:WCN) is one of the largest TSX companies, valued at a market cap of $47 billion. It provides non-hazardous waste collection and disposal services through recycling and renewable fuel generation.
It serves eight million commercial, industrial, and residential customers in 43 states in the U.S. and six Canadian provinces, making Waste Connections the third-largest solid waste company in North America.
WCN stock has surged over 500% in the last decade after accounting for dividends. In this period, the TSX has returned “just” 131%.
Waste Connections has increased its sales from $960 million in 2007 to $7.2 billion in 2022, indicating an annual growth rate of 14.4%.
The bull case for Waste Connections stock
Despite several macro headwinds in 2022, Waste Connections increased sales by 17.2% year over year last year. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew 15.7% to $2.21 billion, indicating a margin of almost 31%. Its adjusted free cash flow also rose by 15.4% to $1.16 billion.
Waste Connections stated an acceleration in pricing through 2022 as well as acquisitions completed in the year would allow it to end 2023 with more than $8 billion in sales.
It continues to reinvest in organic growth and increased capital expenditures by 23% year over year to $3.25 billion in 2022. The company completed 24 acquisitions last year and deployed $460 million to drive inorganic growth.
In early 2022, Waste Connections also issued 10-year, fixed-rate mortgage registered notes worth $1.25 billion and expanded credit facilities by $800 million.
A healthy balance sheet allowed WCN to return $425 million to shareholders via buybacks and $243 million in dividends. So, its dividend-payout ratio stands at less than 30%, providing enough room to increase these payments.
Waste Connections pays investors an annual dividend of $1.38 per share, indicating a yield of just $0.76%. But these payouts have more than doubled in the last six years.
What’s next for WCN stock price and investors?
Analysts expect Waste Connections to increase its adjusted earnings by 13.3% annually in the next five years. So, WCN stock is priced at 32 times forward earnings, which is quite steep.
However, Waste Connections has successfully proven its ability to increase sales consistently while maintaining healthy profit margins. It has a differentiated market model resulting in sector-leading profit margins, which, in turn, provides it with enough room to improve its debt profile and invest in capital-intensive projects.
Analysts remain bullish on WCN stock and expect shares to surge over 15% in the next 12 months.
