Franchise Model In New York City Will Improve Waste Operations Efficiency By 2025

Key Takeaways

• Strong growth through core pricing and acquisitions optimizes operations and enhances future revenue and earnings.
  
• Transitioning to a franchise model in NYC and improved employee retention positively impact revenue growth and net margins.
  
• Regulatory and environmental risks, natural disasters, and macroeconomic fluctuations could impact costs, operational flexibility, and financial performance.

Catalysts

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

• Waste Connections is experiencing strong solid waste growth through 6.8% core pricing and better-than-expected performance from acquisitions, potentially enhancing revenue and earnings as the company integrates these assets fully and optimizes operations.
  
• The transition to a franchise model in New York City is expected to provide Waste Connections with significant opportunities for growth and operating efficiencies, likely positively impacting both revenue and net margins.
  
• With the recent peak in activity at Arrowhead Landfill, Waste Connections is leveraging increased efficiency in its waste flows, potentially benefiting revenue and margin expansion in its Northeast markets.
  
• Record levels of private company acquisition activity are positioning Waste Connections for notable acquisition rollover contributions in 2025, estimated at around 2% additional revenue growth, which could enhance future earnings.
  
• Improved employee retention, with voluntary turnover reduced by over 40% and a focus on employee engagement, is anticipated to drive underlying margin expansion in 2025, positively impacting net margins.

Waste Connections Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Waste Connections's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.8% today to 15.0% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $6.45) by about December 2027, up from $940.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.4x on those 2027 earnings, down from 48.4x today. This future PE is greater than the current PE for the US Commercial Services industry at 31.0x.
• Analysts expect the number of shares outstanding to decline by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.8%, as per the Simply Wall St company report.

Waste Connections Future Earnings Per Share Growth

Risks

• Regulatory risks, such as compliance with U.S. and Canadian securities laws and potential environmental regulations, could increase costs or limit operational flexibility, impacting net margins and earnings.
  
• Vulnerabilities to natural disasters (e.g., hurricanes) pose risks to operational continuity and could result in periodic elevated costs, potentially impacting earnings and net margins.
  
• Fluctuations in commodity prices, particularly in recycled materials, pose a risk to revenue streams and could lead to variance in expected earnings and EBITDA.
  
• Dependence on acquisitions for growth introduces integration risks and potential dilution of margins if acquired operations underperform, potentially affecting net margins and earnings.
  
• Macroeconomic volatility, such as inflationary pressures and geopolitical events (e.g., elections), could impact costs and revenue, influencing overall financial performance, including revenue and net margins.

Valuation

• The analysts have a consensus price target of $197.95 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 $225.0, and the most bearish reporting a price target of just $144.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.0 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 37.4x, assuming you use a discount rate of 6.8%.
• Given the current share price of $176.26, the analyst's price target of $197.95 is 11.0% higher.
• 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.