Easing geopolitical tensions, an improvement in trade talks aimed at defusing a tariff dispute, and a strengthening macroeconomic environment have made investors optimistic, thereby driving the S&P/TSX Composite Index up by 21% compared to its April lows. Amid these solid buyings, the index is trading 8.8% higher for this year. However, Waste Connections (TSX: WCN) has failed to participate in this rally, trading just 0.9% higher for this year. It has lost approximately 13% of its stock value compared to its 52-week high.
Let’s assess whether the pullback presents excellent buying opportunities for long-term investors by examining its recent performance and growth prospects.
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WCN’s first-quarter performance
WCN collects, transports, and disposes of non-hazardous solid waste across the United States and Canada. It operates primarily in exclusive and secondary markets, thereby facing less competition and enjoying higher margins. It has aggressively expanded its footprint through organic growth and strategic acquisitions. Since 2020, the company has acquired over 110 assets, valued at more than $6.5 billion, which has driven its financial growth.
Meanwhile, the Toronto-based waste management company reported an impressive first-quarter performance in May, with its top line growing by 7.5% to $2.28 billion. Price-led organic growth, combined with continued acquisitions, drove its revenue. Supported by top-line growth, its net income came in at $241.5 million, representing a diluted EPS (earnings per share) of $0.93. However, removing special or one-time items, its adjusted EPS stood at $1.13, representing a 9.6% increase from the previous year. Additionally, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) increased by 9.5% to $712.2 million, while its adjusted EBITDA margin expanded by 60 basis points to 32%. The company also generated $541.5 million in cash from its operating activities, while increasing its adjusted free cash flow from $325 million to $332.1 million.
WCN’s growth prospects
WCN is continuing to grow organically and through strategic acquisitions to expand its business. As of April 23, the company had acquired several assets this year that can contribute $125 million to its annualized revenue. These acquisitions include a state-of-the-art recycling facility in New Jersey, which could support its expansion in the Northeastern United States. Given its solid financial position and healthy cash flows, the management projects above-average acquisition activities this year.
Moreover, the company is also developing 12 renewable natural gas facilities, which can contribute $200 million to its annual adjusted EBITDA. The company’s management anticipates that these facilities will be operational by the end of next year. The company is also experiencing low voluntary turnover and fewer open positions amid improved employee engagement and safety parameters. It also utilizes technological advancements, such as robotics and optical sorters, which can improve operational efficiency and drive profitability. Considering all these factors, I believe the uptrend in WCN’s financials will continue.
Investors’ takeaway
Amid the recent pullback, WCN’s next-12-month (NTM) price-to-sales and NTM price-to-earnings multiples have declined to 4.8 and 34.1. Although its valuation still looks expensive, I believe it is justified given its solid underlying business and continued expansion. Additionally, the company has rewarded its shareholders by increasing its dividend at an annualized rate of 14% since 2010. Considering all these factors, I believe WCN would be an ideal investment for long-term investors to purchase at these discounted levels.
