Waste Connections has been treading water for the past six months, recording a small loss of 4.5% while holding steady at $159.73. The stock also fell short of the S&P 500’s 13.3% gain during that period.
Is there a buying opportunity in Waste Connections, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Waste Connections Not Exciting?
We’re cautious about Waste Connections. Here are three reasons why WCN doesn’t excite us, plus one stock we’d rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Waste Connections’s revenue to rise by 5.8%, a slight deceleration versus its 11.3% annualized growth for the past five years. This projection doesn’t excite us and indicates its products and services will face some demand challenges.
2. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Waste Connections’s margin dropped by 2.5 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Waste Connections’s free cash flow margin for the trailing 12 months was 12.1%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Waste Connections historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.6%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
Waste Connections isn’t a terrible business, but it isn’t one of our picks. With its shares underperforming the market lately, the stock trades at 27.3× forward P/E (or $159.73 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.
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