Over the last six months, Waste Connections’s shares have sunk to $157.79, producing a disappointing 7.9% loss while the S&P 500 was flat. This might have investors contemplating their next move.
Is there a buying opportunity in Waste Connections, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Waste Connections Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons we avoid WCN and a stock we'd rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Waste Connections’s revenue to rise by 5%, a deceleration versus its 11.7% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will face some demand challenges.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Waste Connections’s margin dropped by 2.5 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Waste Connections’s free cash flow margin for the trailing 12 months was 13%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Waste Connections historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.6%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
Waste Connections isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 29.8× forward P/E (or $157.79 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.
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