Waste Connections (TSX: WCN) reported an impressive second-quarter performance last month, beating its revenue and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) guidance. Its solid performance appears to have increased investors’ confidence, driving its stock price higher. As of the August 1st closing price, the company’s stock price has risen by 2.8% since reporting its second-quarter performance. Despite the recent increases, it is still down around 10% compared to its 52-week high.
Meanwhile, let’s look at its second-quarter performance and growth prospects in detail to determine whether the stock is a buy at these levels.
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WCN’s second-quarter performance
During the quarter, WCN reported a revenue of $2.407 billion, representing a year-over-year increase of 7.1%. Supported by its acquisitions and solid waste core pricing growth, the company was able to overcome the headwinds from lower-than-expected commodity-related activities and weakness in the economy due to tariff-induced uncertainties to drive its revenue.
Compared to the previous year’s quarter, the company’s solid waste pricing increased by 6.6%. The company has continued expanding its asset base by making several acquisitions this year, which can contribute $200 million to its annualized revenue. Additionally, the company witnessed solid employee retention and record safety performance during the quarter, leading to expansion of its margins.
Meanwhile, its operating income grew 8.2% to $459.5 million. Its net income came in at $290.3 million. However, removing one-time or special items, its adjusted net income stood at $333.1 million or an adjusted EPS (earnings per share) of $1.29, representing a 4% increase from the previous year’s quarter. Further, the company’s adjusted EBITDA rose 7.5% to $786.4 million, while its adjusted EBITDA margin expanded 10 basis points to 32.7%. It also generated adjusted free cash flows of $367 million, representing 15.2% of its total revenue. At the end of the quarter, the company had $267.5 million of cash, cash equivalents, and restricted cash. Therefore, WCN is well-equipped to fund its growth initiatives. Let’s look at its growth prospects.
WCN’s growth prospects
WCN is focusing on organic growth and acquisitions to expand its footprint. It is building 12 renewable natural gas facilities that could become operational next year. Once they become operational, these facilities can contribute $200 million to the company’s annualized EBITDA. Along with these expansions, the adoption of technological advancements, such as robotics and optical sorters, and improvement in employee voluntary turnover could lead to expansion of its operating margins.
Moreover, WCN could continue with its acquisitions, given its solid financial position, healthy cash flows, and a robust acquisition pipeline. The management is predicting an above-average acquisition activity this year. Considering all these factors, I believe WCN could continue to drive its financials in the coming quarters.
Investors’ takeaway
Although WCN has witnessed healthy buying over the last few days, it has underperformed the broader equity market this year, with the company returning just 4.7% year to date. Meanwhile, the company currently trades at a next-12-month price-to-earnings multiple of 34.5. Although it looks expensive, I believe its solid financials, improving operating margins, and healthy growth prospects have made investors optimistic, thereby driving its valuation. Additionally, the company has rewarded its shareholders by raising its dividend uninterruptedly since 2010 at a 14% compound annual growth rate. Considering all these factors, I believe WCN would be an excellent buy despite its expensive valuation.
