Employee Engagement And RNG Investments Will Improve Operational Efficiency In 2025

Key Takeaways

• Strategic acquisitions and organic growth are set to drive revenue and earnings, supported by effective integration and a strong acquisition pipeline.
  
• Investments in sustainability initiatives are expected to reduce costs and create high-margin revenue streams, improving long-term net margins.
  
• Closure of Chiquita Canyon landfill and high interest rates could negatively impact margins and earnings amid regulatory costs and economic uncertainties.

Catalysts

Provides non-hazardous waste collection, transfer, disposal, and resource recovery services in the United States and Canada.

• Waste Connections' focus on employee engagement and reduced turnover has improved operational execution, leading to expected margin expansion in 2025. This could positively impact net margins.
  
• Price-led organic solid waste growth, supported by acquisition integration, positions Waste Connections to potentially exceed targets and achieve substantial free cash flow, likely benefiting revenue and earnings.
  
• The company has redirected waste from the closed Chiquita Canyon landfill to another landfill, minimizing financial impact and optimizing asset utilization, which should stabilize revenue and net margins.
  
• A robust acquisition pipeline, with over $75 million in annualized revenue expected to close in Q2 2025, indicates continued growth opportunities and potential for increased earnings.
  
• Investment in sustainability-related projects, like PFAS treatment and renewable natural gas (RNG) generation, may reduce future costs and increase high-margin revenue streams, enhancing long-term net margins and earnings.

Waste Connections Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Waste Connections's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 14.7% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $6.45) by about March 2028, up from $617.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.6x on those 2028 earnings, down from 78.4x today. This future PE is greater than the current PE for the US Commercial Services industry at 30.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Waste Connections Future Earnings Per Share Growth

Risks

• The decision to close the Chiquita Canyon landfill by the end of 2024, driven by imposed tonnage limits and financial infeasibility, may lead to a loss of revenue and incur significant closure and post-closure costs that could impact overall margins.
  
• Significant incremental outlays at the Chiquita Canyon landfill in 2024 outpaced expectations due to regulatory, permitting, legal, consulting, and other costs, potentially hindering net margins if similar unforeseeable expenses arise elsewhere.
  
• Although Waste Connections has made record acquisitions, shedding unprofitable contracts from these deals may impact near-term volume growth, affecting revenue realization negatively.
  
• Declines in commodity, RIN values, and FX rates present a potential revenue headwind, with lingering effects that could materialize if these rates do not recover significantly in 2025.
  
• Persistent high interest rates could continue to influence the borrowing costs, which impacts the earnings figures if the company relies on debt for ongoing acquisition activities or capital projects.

Valuation

• The analysts have a consensus price target of $200.263 for Waste Connections based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $219.0, and the most bearish reporting a price target of just $149.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.9 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 39.6x, assuming you use a discount rate of 7.1%.
• Given the current share price of $187.58, the analyst price target of $200.26 is 6.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.