On today’s Breakouts report, there are 25 stocks on the positive breakouts list (stocks with positive price momentum) and 65 securities are on the negative breakouts list (stocks with negative price momentum), over half of which are energy stocks.
Discussed today is a stock that is on the positive breakouts list - Waste Connections Inc. (WCN-T). On Tuesday, the share price closed at a record high on high volume, jumping on news of a $1-billion purchase.
On Dec. 11, the company announced its plan to acquire 30 energy waste treatment and disposal facilities in western Canada (18 treatment, recovery and disposal facilities, six landfills, four saltwater disposal injection wells and two disposal caverns) from Secure Energy Services Inc. (SES-T). Together, these assets generate annual revenue of roughly $300-million. The acquisition is expected to close in the first quarter of 2024.
In a news release, president and chief executive officer Ron Mittelstaedt said, “This acquisition represents a unique opportunity for outsized value creation from the expansion of our presence in Canada through a network of E&P [exploration and production] waste treatment and disposal assets located in the most attractive and growing basins. The divestitures are a rare combination of high-quality, well-situated disposal and treatment assets with significant internal capacity for growth. With a heavy orientation towards serving customers engaged in energy production activity, these assets will be complementary to our U.S. R360 Environmental Solutions operations. Once closed, this acquisition is expected to add over 50 basis points to our consolidated EBITDA [earnings before interest, taxes, depreciation and amortization] margin, given the high margin, disposal-oriented profile of the facilities. Moreover, we also expect this transaction to be accretive to earnings per share and free cash flow margins.”
A brief outline on Waste Connections is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Waste Connections’ core business offers solid waste collection, solid waste disposal and transfer, and solid waste recycling services with operations across North America. The company has operations in 44 U.S. states and six Canadian provinces.
In terms of geographical revenue breakdown, 87 per cent of total revenue stemmed from the U.S. in 2022 with the balance from Canada.
There is seasonality in the company’s revenues. Historically, revenues are lowest in the winter months, or first quarter.
The stock is dual-listed trading on both the Toronto Stock Exchange and the New York Stock Exchange under the ticker, WCN.
Investment thesis
- Industry leader. North America’s third largest solid waste company.
- Strong and seasoned leadership.
- Revenue growth fueled by internal growth and acquisitions. The company completed 24 acquisitions in 2022, 30 acquisitions in 2021, 21 in 2020, and 21 acquisitions in 2019.
- Pricing power. Ability to put through price increases. In 2022, solid waste pricing increased 9 per cent year-over-year.
- Longer-term contracts. Collection services under municipal contracts and exclusive franchise agreements typically cover multiple years.
- Steady and attractive margins. The adjusted EBITDA margin stood at 30.8 per cent in 2022. Between 2019 and 2023, the adjusted EBITDA margin came in at between 30.5 per cent and 31.2 per cent.
- Solid price returns. On Dec. 12, the share price closed at a record high. Year-to-date, the share price is up 10 per cent. Looking back, the share price increased 4 per cent in 2022, 32 per cent in 2021, 11 per cent in 2020, 16 per cent in 2019, 14 per cent in 2018, 27 per cent in 2017 and 56 per cent in 2016.
- Double-digit annual dividend growth.
- Potential catalysts: Once the acquisition of assets from Secure is complete (expected closing in the first quarter of 2024), analysts may lift their earnings expectations and target prices. Also, in February of 2024, management is expected to announce its formal outlook for the year.
Quarterly earnings
After the market closed on Oct. 25, the company reported solid third-quarter earnings results. Revenue came in at US$2.065-billion, up 9.8 per cent year-over-year. Adjusted EBITDA was US$671.2-million, in-line with the consensus estimate and up 14 per cent year-over-year. Adjusted EBITDA margin stood at 32.5 per cent. Adjusted earnings per share came in at US$1.17, three cents above the Street’s expectations. At quarter-end, the leverage ratio stood at approximately 2.75 times.
Despite the strong financial results, the share price declined nearly 7 per cent the following day on high volume as landfill issues at two sites put pressure on the stock. This pullback proved to be short-lived with the share price closing at a record high on Dec. 12.
On the earnings call, Mr. Mittelstaedt remarked, “We absorbed over $6 million in additional operating expenses at our Chiquita Canyon landfill in Southern California, where we are managing and working to resolve what is characterized as an elevated temperature landfill or ETLF [elevated temperature landfill] event. This refers to a reaction, resulting in the rapid breakdown of waste at elevated temperatures. In this case, occurring deep underground in an older portion of landfill involving nonhazardous waste that was accepted and handled prior to our ownership of the site. While there are currently no impacts to ongoing waste acceptance at the site, the reaction has led to escalating amounts of leachate generation accompanied by odor impacts. Since communicating this occurrence to the appropriate governing and regulatory bodies, we have been coordinating our efforts to address the odors, handle the leachate and satisfy the concerns of various constituents. The incremental costs in Q3 [third quarter] primarily included leachate treatment and disposal along with engineering and monitoring costs. We expect these expenses to expand in Q4 [fourth quarter] to over $10 million, primarily as a result of increased leachate generation. Beyond that, we have determined that we are not yet currently in a position to estimate the ultimate impact or timing of resolution. We expect to have good clarity of timing and resolution by our February call.
“The second landfill issue noted earlier is more clearly defined and more limited but nonetheless expected to impact Q4. At our Seabreeze Landfill in Texas, we experienced a slope failure at the end of the third quarter that has resulted in our shutting down the landfill and redirecting tons to alternative disposal sites while we complete repairs and site work. The impact of lost revenue and increased expenses at this site in Q4 are expected to be in the range of $5 million to $10 million, depending on how quickly we are able to reopen the site. We currently expect to reopen the site in mid-December.”
Dividend policy
Management remains committed to its dividend.
On Oct. 25, management announced an 11.8 per cent dividend increase, lifting its quarterly dividend to 28.5 US cents per share, up from 25.5 US cents per share, equating to an annual dividend of US$1.14. This marks the 13th consecutive double-digit percentage annual increase since the company’s inaugural dividend in 2010.
The current annualized yield stands at approximately 0.8 per cent.
Analysts’ recommendations
Aince the company released its third-quarter financial results in October, 22 analysts have issued research reports, of which 15 analysts have buy-equivalent recommendations, five analysts have neutral recommendations, and two analysts (Morningstar’s Brian Bernard and Veritas’ Darryl McCoubrey) have “sell” recommendations. Morningstar has maintained a “sell” recommendation since 2020. Veritas has had a “sell” or “reduce” recommendation on the stock since mid-2022.
The firms providing recent research on the company are: ARC Independent Research, ATB Capital Markets, BMO Capital Markets, CIBC World Markets, Citi, Cowan, Goldman Sachs, Jefferies, JP Morgan, Morgan Stanley, Morningstar, Oppenheimer & Co., Raymond James, RBC Capital Markets, Sadif Investment Analytics, Scotiabank, Stifel, Truist Securities, Veritas Investment Research, Wells Fargo, Wolfe Research and Zachs.
Revised recommendations
After the company announced the acquisition of assets from Secure Energy Services Inc. on Dec. 11, several analysts revised their target prices including:
- CIBC’s Kevin Chiang to US$167 from US$156.
- Morningstar’s Brian Bernard to US$124 from US$127.
- Scotiabank’s Michael Doumet to US$146.50 from US$141.
Financial forecasts
The company reports its financial results in U.S. dollars.
The Street is expecting EBITDA of $2.5-billion in 2023, up from $2.22-billion reported in 2022, increasing to $2.77-billion in 2024 and $3 billion in 2025. The Street is forecasting earnings per share of $4.14 in 2023, up from $3.82 reported in 2022, rising to $4.73 in 2024 and $5.32 in 2025.
Valuation
According to Bloomberg, Waste Connections is trading at an enterprise value-to-EBITDA multiple of 16 times the 2024 consensus estimate, in-line with its five-year historical average. The peak EV/EBITDA multiple is just over 19 times during this time period.
Most analysts express their target prices in U.S. dollars. The average one-year target price is US$154 or $210.19, suggesting the share price has 6-per-cent upside potential.
Insider transaction activity
Most recently, senior vice-president of operations Rob Nielsen sold 500 shares at a price per share of US$140.50 on Dec. 6 with 2,550 shares remaining in this specific account. Proceeds from the sale exceeded US$70,000, excluding trading fees.
Prior to that, senior vice-president, deputy general counsel and assistant secretary Robert Cloninger divested 2,945 shares at an average price per share of roughly US$129.89 on Nov. 1, leaving 12,299 shares remaining in this particular account. Proceeds from the sale totaled over US$382,000, not including commission charges.
Chart watch
On Dec. 12, the share price closed at a record high.
After the company announced the acquisition of assets from Secure on Dec. 11, the share price rallied 3 per cent the following trading day on high volume with over 1 million shares traded on the Toronto Stock Exchange. The three-month historical daily average trading volume is approximately 445,000 shares.
Year-to-date, the share price is up 10 per cent, making it the 14th-best performing stock in the S&P/TSX industrials (sector) index, which is up 7 per cent.
Looking at key technical resistance and support levels, the stock is approaching a ceiling of resistance around $200. After that, the next major resistance level is around $220. Looking at the downside, there is initial technical support level around $185, near its 50-day moving average (at $184.64) and its 200-day moving average (at $186.23). There is strong technical support around $180.
ESG Risk Rating
According to risk provider Sustainalytics, Waste Connections has an environmental, social and corporate governance (ESG) risk score of risk score of 21.8 as of Oct. 26, 2023. A risk score of between 20 and 30 reflects a “medium risk” rating.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
This report should not be considered an investment recommendation.