Shares of waste service company Waste Connections, Inc. WCN hit a new 52-week high of $79.90 on Dec 27, 2016, closing the trading session a notch lower at $79.03, for a healthy year-to-date return of 40.32%.
Waste Connections’ share price has been on a steady uptrend since Oct 2016. Despite its strong price appreciation, this Zacks Rank #3 (Hold) stock still appears to have room to run. It currently has a long-term earnings growth expectation of 21.30%.
Growth Drivers
Waste Connections had a dream run this year as it outperformed the Zacks categorized Waste Removal Services industry with an average year-to-date return of 61.7% compared with 18.3% for the latter. Earnings estimates have also seen an increase over a period of 60 days, with estimates moving from $2.50 per share to $2.51 for 2016 and from $2.95 to $2.97 for 2017. The company also has a strong earnings surprise history, beating estimates thrice, over the trailing four quarters.
With prime location of disposal sites within competitive markets, Waste Connections has optimal asset positioning to generate higher profitability. Given the importance of costs associated with the transportation of waste to treatment and disposal sites, having disposal capacity proximate to the waste stream offer a competitive advantage and serve as a barrier to entry. An experienced management team, decentralized operating strategy and financial strength remain additional tailwinds.
One of the most important profitability metrics is Return on Equity (ROE). ROE reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. Waste Connections currently has a ROE of 12.10%, whereas the industry’s ROE is 8.55%. The favorable ROE also acts as a growth driver for the company.
Waste Connections and rival Progressive Waste Solutions Ltd merged in Jun 2016 to create an industry leader with enhanced scale and a stronger financial profile. With complementary footprints, the combined company has pro forma revenues of approximately $4.1 billion and operates an integrated network of solid waste operations across North America. The combined company will benefit from a diverse revenue base and has strategic assets uniquely positioned for continued growth. In addition, the combination is expected to generate approximately $50 million in annualized SG&A cost savings within the first 12 months after closing. Operational and safety-related improvements and market rationalization are likely to contribute additional upside, over the long-term.
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