Waste Connections Earnings: Pricing Remains Strong; Acquisition Adds Waste-to-Rail Disposal Network

After reviewing Waste Connections’ WCN second-quarter financial results and 2023 outlook, we’ve raised our fair value estimate for New York Stock Exchange-listed shares about 9% to $118 per share. Waste Connections’ profit margin has outpaced our expectations this year, despite margin headwinds from lower recycled commodity prices. We’re now modeling adjusted EBITDA margin to average 31.5%-32.0% over the next five years, about 40 basis points higher than our previous outlook. Our more optimistic profit margin outlook, along with the time value of money, were key factors behind our increased fair value estimate. We raised our fair value estimate for Toronto Stock Exchange-listed shares to CAD 157.

Consolidated revenue increased over 11% year over year as higher prices and acquisitions more than offset lower volume and recycling revenue. Core price net of lower fuel surcharges accounted for 9.1 percentage points of growth and acquisitions added another 6.7 percentage points. Volume was down 190 basis points and recycling revenue fell 150 basis points year over year. The key takeaway here is that pricing power remains strong – a function of Waste Connections’ wide moat – and lower volume was mostly due to Waste Connections walking away from low-margin contracts, not a sign of a slowing economy or increased competitive pressure.

Second-quarter adjusted EBITDA margin compressed 10 basis points year over year, to 31.1%, which is still a strong level of profitability and was 30 basis points ahead of what we had modeled. Management is targeting a 31.5% full-year adjusted EBITDA margin, which looks attainable to us.

Waste Connections announced the acquisition of Arrowhead Environmental, which owns the 1,400-acre Arrowhead landfill in Alabama that serves numerous East Coast markets via rail. Management sees an opportunity to internalize (vertically integrate) some of its Northeast markets. Arrowhead will add approximately $100 million of revenue.