Waste Connections

Moat: 4/5

Understandability: 2/5

Balance Sheet Health: 4/5

Waste Connections is an integrated solid waste services company providing non-hazardous waste collection, transfer, disposal, and recycling services, with operations primarily in the U.S. and Canada.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Waste Connections boasts a wide moat, largely driven by its asset-heavy, local market focused, route-density business model, along with its highly disciplined management team. This moat is further strengthened by contracts and permits that are difficult to replicate. However, competition is still a factor and the business also has some notable risks that are described in detail below.

Business Overview

Waste Connections operates across the United States and Canada, providing essential waste management services. Their business model focuses on having a strong regional presence, aiming to achieve a high degree of route density, which means more revenue from each trip through collection and transfer. This route density lowers cost since there is a shorter distance between collection points.

The company’s operations are divided into the following segments:

  • Collection: This involves picking up waste from residential, commercial, and industrial locations.
  • Transfer: Here, collected waste is transported to larger facilities.
  • Disposal: This is the process of disposing of waste in landfills or through other means.
  • Recycling: This involves the processing and selling of recyclables.
  • E&P Waste: This segment provides specialized services for the oil and natural gas industry, including drilling and production waste management.
  • Renewable Energy: This segment includes the generation and sale of renewable energy from landfill gas.

Key factors in the company’s success are its ability to maintain high route density, manage its capital expenses, and utilize innovative solutions for maximizing resource recovery. It is also a heavily regulated industry, and so its success is also dependent on its ability to comply with the regulations.

Industry Dynamics & Competitive Landscape

The waste management industry is characterized by consistent demand due to the necessity of waste disposal and the need for recycling. This gives stability to the business.

However, it’s also a very competitive sector that has the following characteristics:

  • Intense competition: The industry is often highly competitive, especially in urban areas, with several large companies vying for market share.
  • High capital requirements: Setting up and maintaining a waste management business requires significant capital investments, especially on trucks and collection equipment.
  • Regulatory hurdles: The industry is often subject to a plethora of regulatory bodies and strict environmental requirements.
  • Economies of scale: Larger firms often gain an advantage through economies of scale, allowing them to provide more efficient and lower-cost services.
  • Low switching costs: For some segments of the market, mainly commercial customers, switching costs are low, since they can easily change providers if they think they are getting a better deal.

Waste Connections sets itself apart with its focus on secondary or smaller markets. It focuses on markets with little competition and high barriers to entry for new competitors and seeks acquisitions in these regions.

Financial Deep Dive

Let’s take a look into the most recent financials.

Revenue and Profitability

  • Revenue: Waste Connections’ revenue was up 14% in their Q3 2023 earnings compared to Q3 2022, driven by strong pricing and solid volume growth.
  • EBITDA: The adjusted EBITDA margin for Q3 2023 was 31.5%. Their earnings are being driven by high prices for solid waste disposal, high revenue growth, and a focus on cost reduction.
  • Free Cash Flow: The company has a history of solid free cash flow and the ability to invest cash back into the business or return it to the shareholders.
  • Debt: They have a disciplined approach to spending and managing debt, with a leverage ratio of 2.69 at the end of Q3 2023.
  • Acquisitions: The company consistently engages in accretive acquisitions.

Recent Financial results reveal the following important metrics:

  • The company’s revenue is resilient. This indicates the essential nature of the services that the company provides which results in consistent revenue.
  • Margins are increasing due to better pricing and cost controls. This is important for a moat company as they should be improving their efficiencies.
  • They have great cash flow. This indicates the health of their underlying operations.
  • They are making smart accretive acquisitions which help the company grow revenue and expand into new regions.

Balance Sheet

  • Debt to Equity: Although the company does have debt, they have shown their ability to delever and their interest payments are low relative to their profitability.
  • Working Capital: It maintains sufficient working capital to support operations.
  • Asset Base: Their physical assets are a vital part of their business as they need trucks, machinery, and land to operate.

Overall, Waste Connections shows a strong and healthy balance sheet. It’s showing a company with a steady growth in assets and cash flow that is being prudently managed by the company’s management.

Recent Issues

  • During the past few quarters, the company has been struggling with high labor costs as well as supply chain problems related to trucks and equipment. Management has been taking steps to reduce costs as well as exploring alternatives to procure equipment in the future to mitigate these concerns.
  • The most recent earnings calls show that they are facing some softness in the housing sector. This is hurting their waste generation volumes. However, they believe that the underlying business is solid and this should only be a temporary effect.
  • They are also continuing to explore M&A deals to further expand their business and are doing this cautiously to ensure they don’t overpay.
  • The management has been focusing on improving operating efficiencies while ensuring top quality service for its customers.

Management is focusing on efficiency, controlling costs, and taking a long term view on value generation for their shareholders. It is not surprising that the management is very experienced and that there is a clear strategic direction in terms of operations and M&A.

Moat Rating: 4/5

Waste Connections has a narrow, but solid, wide moat. This is supported by:

  • Route Density: The company’s focus on local markets allows for the creation of dense routes, meaning higher profits from each customer.
  • Economies of Scale: Being a large company allows for the ability to absorb fixed costs, making the company a low cost operator.
  • Regulatory Environment: The regulations are very strict which protects against any new competitors.
  • Contracts and Permits: The company has long term contracts as well as long term permits that give them an advantage.

Risks to the Moat & Resilience

  • Technological Disruption: The company could suffer from changes in waste disposal technology that would render its assets obsolete. For instance, the waste to energy market could drastically change the economics of traditional landfills.
  • Regulatory Changes: The regulatory landscape of the industry could change and potentially decrease or disrupt their cash flows. For example, more stringent environmental laws may make landfills more expensive to operate.
  • Economic Downturn: A sharp recession would reduce waste generation, affecting their revenues.
  • Competition: A new competitor with a new type of approach could gain enough market share to affect the company.

The company has shown that they have been able to weather a lot of difficulties and still maintain strong profitability and growth which indicates the resilience of the business. Also, their diversified business structure reduces impact from sudden change in single region of business. Also, they have a very strong management with a proven track record of dealing with various challenges.

Understandability: 2 / 5

This is a complex business with many parts and requires a fair amount of financial knowledge to understand it well. There are a lot of moving pieces from the different types of revenues to the company’s complex accounting process regarding waste.

Balance Sheet Health: 4 / 5

The company has a sound balance sheet, but not perfect. They have debt which does not pose a major issue given strong profitability, but their equity and cash holdings could be better.