Waste Connections (TSX: WCN) is a waste management company that collects, transfers, and disposes of non-hazardous solid waste. It operates predominantly in the secondary and exclusive markets of the United States and Canada, thereby facing less competition and enjoying higher margins. However, the company has been under pressure over the last few months, losing over 17% of its stock price from its April highs. Concerns about the decline in values for recycled commodities and renewable energy credits, along with ongoing economic uncertainty, have weighed on the company’s stock price.
Meanwhile, let’s examine the company’s recently reported third-quarter results and evaluate its growth prospects to identify potential buying opportunities.
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WCN’s third-quarter performance
In the third quarter that ended on September 30, WCN posted revenue of US$2.5 billion, representing a 5.1% increase from the previous year’s quarter. A core solid waste price increase of 6.3% and US$77 million contribution from acquisitions over the last four quarters more than offset a volume decline of 2.7% to drive its topline. Along with sluggishness in cyclically exposed activities, the purposeful shedding of low-margin contracts lowered its volume.
Meanwhile, the company generated adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of US$830.3 million, up 5.4% from the previous year’s quarter. Also, its adjusted EBITDA margin expanded 10 basis points to 33.8%. The expansion of solid waste margins more than offset the negative impact of values for recycled commodities and renewable energy credits, driving its adjusted EBITDA margin.
The company generated US$384.6 million of free cash flow during the quarter, bringing total free cash flow to US$1.1 billion over the first three quarters, and is on track to generate US$1.3 billion this year. Amid strong cash flows, the company has repurchased approximately 2.4 million shares year to date, reducing its share count by 1%. It also raised its quarterly dividend by 11.1% to US$0.35/share, marking its 15th consecutive year of double-digit dividend growth. The waste manager’s financial position also looks solid with its net debt-to-EBITDA multiple below its target of 2.8 times. Now, let’s look at its growth prospects.
WCN’s growth prospects
WCN is expanding its footprint through strategic acquisitions. Year-to-date, it has acquired several assets that can contribute around $300 million to its annualized revenue. Supported by its solid financials and healthy cash flows, the company expects above-average acquisition activity to continue in the fourth quarter and the first quarter of the next fiscal year.
Alongside these expansion efforts, WCN is leveraging technology to enhance customer experience, boost operational efficiency, and drive profitability. The company is digitizing and automating its processes, improving forecasting through data analytics, and strengthening service delivery. Further, the waste solutions provider is continuing its employee engagement efforts, resulting in 12 consecutive quarters of declining voluntary turnover, down over 55% from its highs in late 2022 and early 2023. Also, safety incident rates have improved to a multi-year low for the company.
On the back of these developments, WCN’s management has reiterated its 2025 guidance while expecting mid-single-digit revenue growth in 2026. Furthermore, management expects adjusted EBITDA margins to expand within the normal range, supported by above-average solid waste margin growth, partially offset by margin dilution from acquisitions and commodity-related pressures.
Investors’ takeaway
Despite the near-term headwinds, WCN’s long-term growth prospects look healthy. Besides, the company has consistently raised its dividends at a healthier rate for the past 15 years and currently offers a forward dividend yield of 0.83%. Also, the recent pullback has dragged its NTM (next 12 months) price-to-earnings multiple down to 30.5. Considering all these factors, I believe WCN offers excellent long-term buying opportunities.
