Waste Connections Earnings: Strong Operating Results Overshadowed by Near-Term Headwinds

Wide-moat-rated Waste Connections’ WCN solid third-quarter results were overshadowed by nonrecurring costs incurred during the quarter. Despite meaningful adjusted EBITDA margin improvement, shares declined nearly 7% on Oct. 26 as the market digested the news that issues with two of the company’s landfills could affect revenue, operating expenses, and free cash flow by up to $20 million during the fourth quarter. Nevertheless, we maintained our $121 per share fair value estimate for New York Stock Exchange-listed shares. We raised our fair value estimate for Toronto Stock Exchange-listed shares CAD 1 to CAD 167 due to the change in the USD/CAD ratio since our last update.

Pricing power remains robust for Waste Connections as core price net of lower fuel surcharges increased 7.7% year over year. As a result, adjusted EBITDA margin expanded 140 basis points sequentially and 120 basis points year over year. However, given that 40% of pricing is CPI-linked, we would expect core price growth to moderate in the future as inflation continues to decelerate. Even so, we forecast EBITDA margin expansion will continue over the next several years.

Waste Connections’ solid performance during the quarter was in spite of $15 million in unforeseen headwinds related to risk-related expenses, as well as idiosyncratic failures experienced by two of the company’s landfills. Elevated temperatures at the company’s Chiquita Canyon facility in California resulted in a rapid breakdown in waste, which in turn fueled elevated levels of leachate or polluted runoff. As a result, the company could incur incremental costs over $10 million with no definitive timeline as to when the issue will be resolved. Additionally, an engineering issue with its Seabreeze landfill in Texas could reduce operating income by $5-$10 million during the fourth quarter but should be resolved by December. Nonetheless, management reaffirmed prior sales and adjusted EBITDA guidance as it continues to monitor the situation.