Waste Connections (TSX:WCN) is a Canadian waste management company that collects, transfers, and disposes of non-hazardous solid waste across the United States and Canada. Supported by its solid quarterly performances and healthy growth prospects, the company is trading 14.9% higher this year, outperforming the broader equity markets. Let’s assess whether Waste Connections would be a buy at these levels by looking at its performance in the recently reported first quarter, growth prospects, and valuation.
Waste Connections’s first-quarter earnings
Waste Connections reported solid first-quarter earnings, with its top line growing by 9.1% to US$2.07 billion. Contributions from acquisitions over the last 12 months and higher recovered commodity values drove its top line. Meanwhile, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew 14.8% to US$650.7 million. It was US$10 million higher than the management’s guidance. Also, its adjusted EBITDA margin expanded by 160 basis points from the previous year and 20 basis points from the prior quarter to 31.4%.
Supported by its top-line growth and expansion of its operating margin, Waste Connections’s net income grew by 16.3% while its adjusted EPS (earnings per share) grew by 16.9%. The company generated an adjusted free cash flow of $324.8 million, representing an 18.5% increase from the previous year’s quarter. Its free cash flows were 15.7% of its total revenue, an improvement from 14.4% in the previous year’s quarter. During the quarter, the company raised US$750 million through senior notes, with the proceeds directed towards reducing its debt levels.
Now, let’s look at its growth prospects.
Waste Connections’s outlook
Given its solid financial position and healthy free cash flows, Waste Connections is well-equipped to continue its acquisitions, with the company naming 2024 one of its busiest years ever. As of April 24, the company has made several acquisitions this year that could contribute US$375 million of annualized revenue. In February, it acquired 30 energy waste treatment and disposal facilities, which could contribute around $300 million to its total revenue.
Further, Waste Connections also focuses on organic growth and is developing several renewable gas or RNG (renewable natural gas) facilities, three of which will be operational this year. Also, despite the industry-wide equipment and utility installation delays, the company’s management is optimistic that its developmental projects could deliver an incremental $200 million annual EBITDA beginning in 2026. Meanwhile, the company has planned to invest around $150 million in these projects this year.
Amid these growth prospects, Waste Connections’s management has provided impressive 2024 guidance, with its topline projected to grow by 9.1% to $8.75 billion. Its adjusted EBITDA could increase by 13.4% while expanding its adjusted EBITDA margin by 120 basis points to 32.7%. So, its growth prospects look healthy.
Investors’ takeaway
Amid the recent increase in its stock price, Waste Connections’s valuation has increased, with its next 12-month price-to-earnings multiple at 34.1. Although its valuation looks expensive, I believe it is justified, given its solid underlying businesses, improving profitability, and healthy growth prospects. It has also raised its dividends at an annualized rate of 14.3% since 2010, which is encouraging.
The broader equity markets have turned volatile amid concerns over high inflation, geopolitical tension, and the impact of high interest rates on global growth. So, in this uncertain outlook, Waste Connections, which has been delivering consistent performances over the years, would be an ideal buy.
