Waste Connections (TSX: WCN) is an integrated solid waste management company engaged in the collection, transfer, and disposal of non-hazardous solid waste. The company primarily operates in secondary and exclusive markets across 46 U.S. states and six Canadian provinces, serving approximately 9 million residential, commercial, and industrial customers. WCN stock has been under pressure over the last few months due to concerns over its high valuation.
Amid the recent weakness, it currently trades at a discount of around 15% compared to its 52-week high. Therefore, let’s assess its second-quarter performance and growth prospects to determine whether the pullback offers any buying opportunities in the stock.
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WCN’s second-quarter performance
In the second quarter, WCN reported revenue of US$2 billion, representing a 7.1% increase from the same quarter of the previous year. Backed by acquisitions over the past four quarters and solid waste core pricing growth of 6.6%, the company managed to offset challenges from weaker commodity-related activities and tariff-driven economic uncertainties, thereby supporting its topline growth.
Along with topline growth, its continued improvement in employee retention and safety records led to the expansion of its operating margin, which grew 20 basis points to 19.1%. Meanwhile, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) rose 7.5% to $786.4 million, while its adjusted EBITDA margin expanded by 10 basis points to 32.7%. Furthermore, its adjusted EPS (earnings per share) stood at $1.29, representing a 4% increase from the same quarter in the previous year. The waste manager also generated $367 million of free cash flow during the quarter. Now, let’s look at its growth prospects.
WCN’s growth prospects
Given the essential nature of its business, the demand for WCN’s services remains resilient irrespective of the macroeconomic environment. Moreover, the company has made several acquisitions this year as of July 23 that can contribute US$200 million to its annualized revenue. Given its solid cash flows and healthy financial position, the company’s management expects to continue with its acquisitions, which can support its topline growth.
Additionally, WCN is building 12 natural gas facilities, with management predicting that these facilities will become operational in 2026. These facilities together can contribute around US$200 million to its EBITDA. Furthermore, the company has made a capital investment of US$497.8 million in the first two quarters and is on track to invest between US$1.20 billion and US$1.25 billion for the year. Of these investments, the company has allocated $100 million to $150 million to renewable natural gas facilities.
Along with these growth initiatives, the decline in employee voluntary turnover amid enhanced employee engagement and technological advancements could continue to drive its financials in the coming years.
Investors’ takeaway
Despite its underperformance this year, WCN has delivered around 438% returns over the last 10 years at an annualized rate of 18.3%. Also, the company has raised its dividend at an annualized rate of 14% since 2010 and currently offers a forward dividend yield of 0.71%. Although its dividend yield is on the lower side, investors can benefit from its consistent dividend growth. Considering its growth initiatives, solid underlying business, and improving operating margins, I believe the recent pullback presents an excellent entry point for investors with a medium- to long-term investment horizon.
