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Waste Connections (WCN) Rides on Acquisitions Amid Debt Woes

Zacks Equity Research

Waste Connections Inc. WCN is benefiting from strategic acquisitions. Its focus on secondary and rural markets to garner a higher local market share is appreciable.

Recently, the company reported impressive fourth-quarter 2018 results, with earnings and revenues beating the Zacks Consensus Estimate. Adjusted earnings per share of 63 cents surpassed the consensus mark by 2 cents and improved 21.2% year over year. Quarterly revenues of $1.26 billion outpaced the consensus mark by $34.3 million and increased 9% on a year-over-year basis

Waste Connections has an impressive earnings surprise history, having outpaced estimates in three of the last four quarters. It delivered average four-quarter positive earnings surprise of 1.9%.

What’s Driving Waste Connections?

Waste Connections is bolstering its stake in the solid waste industry through strategic acquisitions. In 2018, the company completed the purchase of 20 individually immaterial non-hazardous solid waste collection, recycling, transfer and disposal businesses. Previously, the company completed 14 acquisitions in 2017, 12 in 2016 and 14 in 2015. Some of the notable acquisitions include that of American Disposal Services and certain affiliates, Groot Industries and Progressive Waste. 

We also appreciate the company’s focus on secondary and rural markets to garner a higher local market share, which will be difficult to attain in more competitive urban markets. This decreases Waste Connections’ exposure to customer churn and improves financial returns.

The company enjoys optimal asset positioning as its disposal sites are located at prime locations, which helps it generate higher profitability. Considering the importance of costs associated with the transportation of waste to treatment and disposal sites, having disposal capacity close to the waste stream offers a competitive advantage.

We are also impressed with Waste Connections’ endeavors to reward its shareholders in the form of dividend payments and share repurchases. In 2018, Waste Connections paid $152.5 million of dividend and repurchased shares worth $58.9 million.


Waste Connections’ balance sheet is highly leveraged. As of Dec 31, 2018, long-term debt was $4.15 billion while cash and cash equivalents were $319.31 million. Such a cash position implies that Waste Connections needs to generate an adequate amount of operating cash flow to pay its debt. Moreover, high debt may limit its future expansion and worsen its risk profile.

Stringent environmental and health and safety laws have been hindering the company’s operations and raising its operating costs. Its revenues are highly seasonal in nature with the first quarter recording the lowest revenues. While revenues increase in the second and third quarters, fourth-quarter revenues are lower than the prior two quarters. The expected revenue fluctuation between the highest and lowest quarters due to seasonality is around 12%. Thus, seasonality lowers predictably in revenue generation and increases operating risks.

Zacks Rank & Stocks to Consider

Currently, Waste Connections carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the broader Zacks Business Services sector are Omnicom OMC, Robert Half RHI and Automatic Data Processing ADP, all carrying a Zacks Rank #2 (Buy). Long-term expected EPS (three to five years) growth rate for Omnicom, Robert Half and Automatic Data Processing is 6.9%, 8.4% and 12.8%, respectively.

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