Over the last six months, Waste Connections’s shares have sunk to $154.45, producing a disappointing 6.9% loss - a stark contrast to the S&P 500’s 7.7% gain. This might have investors contemplating their next move.
Is now the time to buy Waste Connections, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, 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 why WCN doesn't excite us 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 5.4%, a slight deceleration versus its 11.8% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will see some demand headwinds.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Waste Connections’s margin dropped by 2.6 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 12%.
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? A company’s ROIC explains this by showing how much operating profit it makes compared 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 27.3× forward P/E (or $154.45 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
Stocks We Like More Than Waste Connections
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