RNG Projects And AI Adoption Will Transform Waste Services Earnings Profile

Catalysts

About Waste Connections

Waste Connections provides nonhazardous solid waste collection, transfer, disposal and recycling services, along with energy oriented waste handling and renewable natural gas from landfill gas.

What are the underlying business or industry changes driving this perspective?

• Expanded use of AI powered tools in pricing, customer engagement and routing, with seven initiatives scheduled through 2027 and early results already supporting core price retention and lower churn, points to potential uplift in revenue quality and operating efficiency that can support EBITDA margins and earnings.
• Ongoing roll out of about a dozen renewable natural gas projects, with 6 of 12 facilities still targeted to come online by year end and RNG related CapEx expected to wind down as these assets move into full operation, creates a path for an additional recurring revenue stream while easing capital intensity and supporting adjusted free cash flow and earnings.
• Continued improvement in employee retention, now with voluntary turnover below 10% and linked to better safety and service, reduces hiring and training friction and supports stable operations, which can help protect net margins and underpin steady growth in EBITDA and adjusted free cash flow.
• Higher special waste volumes for six consecutive quarters and improving landfill gas and recycled commodity revenues indicate supportive end markets for higher value waste streams, which can mix shift the business toward higher pricing and margin work and support revenue growth and EBITDA margin resilience.
• A robust pipeline of core solid waste and E&P tuck in acquisitions, with about US$100 million of annualized revenue expected to close around Q2 and Q3 and leverage of about 2.75x, gives room to compound the existing base through additional revenue while seeking cost synergies that can support EBITDA growth and long term earnings power.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Waste Connections compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Waste Connections's revenue will grow by 7.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 11.0% today to 14.4% in 3 years time.
• The bullish analysts expect earnings to reach $1.7 billion (and earnings per share of $6.95) by about May 2029, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.3 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 44.6x on those 2029 earnings, up from 36.4x today. This future PE is greater than the current PE for the US Commercial Services industry at 22.2x.
• The bullish analysts expect the number of shares outstanding to decline by 1.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.05%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Reliance on higher special waste activity and E&P waste linked to crude oil prices exposes Waste Connections to cyclical industrial and energy trends. A prolonged slowdown in production-oriented or drilling activity, or a pullback in speculative development, could reduce special waste and E&P volumes, which would pressure revenue and EBITDA.
• Fuel cost volatility, even with hedges covering about 50% of 2026 diesel requirements and surcharge mechanisms, still creates timing lags and potential margin dilution. A period of sustained elevated diesel prices that is not fully offset by hedges, surcharges, or E&P activity could weigh on EBITDA margin and net income.
• Large, long-duration projects such as the approximately dozen RNG facilities and the elevated temperature landfill remediation at Chiquita Canyon carry execution, regulatory, and cost overrun risks. Delays in bringing RNG sites into full operation, weaker than expected landfill gas revenues, or higher than anticipated remediation outlays beyond the US$100m to US$150m free cash flow impact guided for 2026 could constrain adjusted free cash flow and earnings.
• The acquisition-led growth model, including an above-average M&A pipeline and newly acquired E&P and solid waste assets, depends on successful integration, stable end markets, and disciplined capital allocation. Weaker performance from acquired businesses, fewer attractive tuck-in targets, or a sustained increase in funding costs from the approximately US$9.1b debt load at about 4% average interest could limit revenue contribution, compress EBITDA margins, and reduce net income.
• The long-term thesis on margin expansion assumes continued gains from AI tools, employee retention improvements, and risk management benefits. Slower adoption in the field, weaker than expected returns on the roughly US$25m to US$30m annual AI spend, or a reversal in safety and claims trends that lifts risk management costs could limit the 100 basis point margin uplift management targets by 2028 and weigh on EBITDA and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Waste Connections is $254.62, which represents up to two standard deviations above the consensus price target of $204.08. This valuation is based on what can be assumed as the expectations of Waste Connections's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $305.0, and the most bearish reporting a price target of just $156.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $11.8 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 44.6x, assuming you use a discount rate of 7.0%.
• Given the current share price of $151.25, the analyst price target of $254.62 is 40.6% 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.