Waste Connections (TSX:WCN) is a Canadian waste management (i.e., garbage disposal) company. The company’s industry is not glamorous, but that doesn’t mean its stock doesn’t have potential. To the contrary, it has a lot of potential. Waste management is a boring business with good prospects. Possibly because it’s so unglamorous, it has several firms with strong competitive positions and few rivals. Waste Connections is one of them. The company has a very strong competitive position in Canada, with very few competitors. There are larger US companies that do the same thing, but Waste Connections is #1 in Canada. That makes it a very intriguing business. But is it actually a buy? In the ensuing paragraphs, I will explore that question and more.
Garbage disposal: A generational wealth-building opportunity
You might find it hard to believe, but garbage disposal and related services like treatment, dumpster rentals, and trash compactors are big business. These services are not pleasant or glamorous to carry out, so they don’t attract a lot of eager competition. Local companies as well as government services that do similar things as any given waste manager do exist, but there aren’t too many of them. So, companies in the waste management space tend to have better margins than a lot of other businesses.
A strong competitive position
In the previous section, I noted that waste management companies in general tend to have strong competitive positions. Now it’s time to establish that this is in fact the case with Waste Connections. First, the company does not have any publicly traded competitors on the TSX. If you Google “Waste Connections competitors,” you’ll see some blogs with examples, but when I researched them I found that on close inspection they are not really in competition with Waste Connections. Secondly, Waste Connections’ strong competitive position can be inferred from its margins; for example:
- A 41% gross profit margin.
- A 30% EBITDA (earnings before interest and depreciation) margin.
- A 10.8% net income margin.
- An 11% free cash flow margin.
- An 11.8% return on equity.
These are fairly high margins, consistent with my claim that Waste Connections has a strong competitive position.
Strong growth
In addition to its high profit margins, WCN also has decent growth. In the trailing 12-month period it grew its revenue, earnings, and free cash flow at the following rates:
- Revenue: 10.6%.
- Earnings: 13.4%.
- Free cash flow: -1.3%.
Apart from the free cash flow figure, these metrics are pretty good. One might be alarmed about the negative free cash flow growth. However, when we turn to the last 10 years, we see a different situation, with the same metrics compounding at the following rates:
- Revenue: 15.6%.
- Earnings: 12%.
- Free cash flow: 13%.
A decent showing on all three metrics.
An unfortunate valuation
The least flattering part of the analysis for Waste Connections is the valuation multiples. The company trades at 38 times earnings, 5.2 times sales, and 5.6 times book value. These metrics are frankly a little high, and while WCN is growing, it’s arguably not growing at the kinds of rates that justify a 38 P/E ratio. So despite all of the positive things about WCN I wrote above, it’s just a hold in my books.
