Acquisitions And New Jersey Facility Integration Will Boost Operational Excellence

Key Takeaways

• Effective pricing and acquisition strategies, along with strong employee retention, position Waste Connections for robust revenue and margin growth.
  
• Enhanced safety performance and strategic recycling facility integration contribute to cost savings and expanded service capabilities, supporting future growth.
  
• Heavy reliance on acquisitions and volatile commodity-driven revenues pose risks to margins, while weather events and geopolitical factors add uncertainty to future earnings.

Catalysts

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

• Waste Connections’ pricing strategy has shown strong execution with a price-led organic solid waste growth, resulting in high visibility for full-year 2025 core pricing of at least 6%, which is expected to positively impact their revenue.
  
• The company’s reduction in voluntary turnover and improved employee retention for ten consecutive quarters indicate a healthier company environment, likely supporting operating efficiencies and margin expansion, thereby positively impacting net margins.
  
• Record safety performance and reduced incident rates are anticipated to unlock incremental cost savings in future periods, contributing to cost control and improved adjusted EBITDA margins.
  
• Robust acquisition activity, with annualized revenues closed already over $125 million, and a strong balance sheet position Waste Connections well for continued growth and successful integration of acquisitions, supporting future revenue and earnings growth.
  
• The integration of a strategic state-of-the-art recycling facility in New Jersey is expected to complement their expanding New York City franchise, potentially enhancing service capabilities and driving revenue growth.

Waste Connections Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Waste Connections's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $6.5) by about April 2028, up from $629.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.3x on those 2028 earnings, down from 80.3x today. This future PE is greater than the current PE for the US Commercial Services industry at 27.7x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

Waste Connections Future Earnings Per Share Growth

Risks

• The protracted weather events in many markets caused incremental volume weakness, indicating potential risks to future revenue and margins if severe weather becomes more frequent.
  
• Despite generally favorable conditions, the discussion of geopolitical factors such as tariffs suggests there could be unexpected capital or expense increases in the future, which may impact earnings.
  
• The company's growth strategy relies heavily on acquisitions, which could pressure net margins if integration challenges arise or if acquisition synergies do not materialize as expected.
  
• Concerns about potential changes in interest rates and financial market fluctuations indicate a risk to financing costs and capital expenditures, potentially affecting net income.
  
• Commodity-driven revenues remain volatile, with factors such as changes in OCC and RIN prices affecting financial results, which could lead to unpredictable impacts on revenue and margins.

Valuation

• The analysts have a consensus price target of $207.944 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 $227.0, 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 $11.1 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 40.3x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $195.53, the analyst price target of $207.94 is 6.0% 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.