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Breakout in Niche Waste Management Player Could Lead to 13% Gains by Year-End

Melvin Pasternak

In his book One Up On Wall Street, Peter Lynch advocated looking for companies in unattractive industries. Here's one with a bullish chart for you to consider: Turning garbage collection into a multi-billion dollar business, Waste Connections (WCN) provides waste collection, transfer, disposal and recycling services.

Although it is the smallest of the "big three" public U.S. waste management companies by market cap, its recent share performance has handily outpaced the competition.

Over the past three months, the company's stock is up about 20% while shares of the nation's largest trash hauler, Waste Management (WM), are ahead only about 5%. The second largest publicly-listed waste services company, Republic Services, (RSG) has gained about 4%. Waste Connections' recent operating margin was 19.5% compared to the industry average of 13.2%.

One factor that has helped set the company apart is its focus on garbage collection and disposal services in the secondary markets of the rural and suburban Western U.S., rather than the big cities served by its competitors. With minimal competition, the company has achieved strong pricing power.

In addition to occupying a strong market niche, Waste Connections recently expanded its services through last year's acquisition of R360 Environmental Solutions, a leader in oil and gas waste disposal. The company now generates revenue from cleaning contaminated oil fields, recuperating oil from storage tanks and washing drilling facilities.

As a potential bonus for shareholders, Waste Connections may seek master limited partnership (MLP) status to take advantage of tax efficiencies. MLPs typically reward shareholders with high dividend yields.

With a continued economic recovery -- which should generate more goods and a need for additional garbage collection -- Waste Connections could see strong growth ahead.

From a technical perspective, the stock's chart is bullish.

Rising steadily off the July 2010 low of $22.35, shares have formed a major uptrend and have nearly doubled to date.

Starting in the summer of 2011, and persisting for most of 2012, the stock was caught in a rectangular holding pattern. Support near $28.38 represented the bottom of the rectangle. Resistance around $35 marked the top.

In October 2012, shortly after testing support near $28, the stock began a steady ascent, forming an accelerated uptrend line.

The rectangle was bullishly broken in early April 2013, when shares moved past $35 resistance. The stock has since climbed at a steady clip.

Over much of May and June, the stock struggled to break $41. This level now represents a small shelf of resistance.

However, during the July 1 trading week, shares bullishly moved above $41 resistance and are now trading at an all-time high. With no overhead resistance in sight, the stock could potentially soar.

The bullish technical outlook is supported by strong fundamentals.

For the upcoming second quarter, scheduled to be reported at the market's close on July 23, analysts project revenue will increase 17.3% to $481.9 million from $410.7 million in the year-ago quarter.

Due to heightened demand for cleaning services in suburban and rural areas, analysts project full-year 2013 revenue will climb 17% to $1.9 billion from $1.7 billion in 2012.

The earnings outlook is equally strong.

For the upcoming second quarter, analysts expect increased demand for non-hazardous oilfield waste treatment and disposal services will result in a 22% increase with earnings reaching $0.44 per share from $0.36 in the comparable year-earlier period.

Due to expansion of its increased non-hazardous waste treatment services, analysts expect full-year 2013 earnings will rise 15.6% to $1.78 per share from $1.54 last year.

In addition to a solid technical and fundamental outlook, the shares offers a forward annual dividend yield of about 1%. Management has increased the dividend every year since it was started in 2010 and will likely continue to do so -- especially if the company becomes an MLP.

Risks to consider: Waste Connections has made its mark in the competitive waste management industry by focusing on suburban and rural rather than metropolitan areas. However, this industry does not have large barriers to entry. Increased competition in this niche area could reduce Waste Connections' future revenues and profits.

Recommended Trade Setup:

-- Buy WCN at the market open
-- Set stop-loss at $38.12, just below a current shelf of support
-- Set initial price target at $46.95 for a potential 12.8% gain in 5-6 months

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