EUR 850.00 For Business Accounts Only

Morningstar | Solid Pricing and Healthy E&P Waste Activity Offsetting Waste Connection's Recycling Headwinds

As a fully integrated waste hauler, Waste Connections leverages its vast network of collection routes that bestows significant control over the waste stream, funneling trash from commercial, industrial, and residential end markets into its valuable landfill assets. In our view, intangible assets (immense regulatory hurdles to new landfill ownership) and substantial route density have enabled the company to carve out a robust competitive position that translates into impressive margins and solid free cash flow generation.In June 2016, Waste Connections (the third-largest integrated waste hauler at the time) merged with the fourth-largest provider, Progressive Waste, roughly doubling in size. The transaction afforded Waste Connections the opportunity to apply its top-tier operational know-how and pricing discipline to bring Progressive’s profitability up to par with its own. Waste Connections also gained entrance into new geographic regions, most of which fit its differentiated focus on less-competitive secondary markets—a strategy that’s contributed to its industry-leading margins. Progress optimizing Progressive’s operations has proved impressive over the past few years, and the firm's portfolio is enjoying tailwinds from healthy U.S. macroeconomic growth, particularly strong single-family housing starts, which lead waste volume by slightly more than a year. We expect Waste Connections to continue its tuck-in acquisition strategy, and its ability to raise core price on acquired volume (thanks to its vast ownership of landfills, a preferred asset) should support free cash flow growth.While making up only about 2%-3% of total revenue, Waste Connections’ recycling operations are grappling with painful near-term headwinds—prices for recycled commodities the firm extracts and sells, particularly old corrugated cardboard, have plummeted on China’s decision to suspend certain import licenses during the second half of 2017. That said, we expect these headwinds to stabilize somewhat in the years ahead as the firm manages facility operating costs, optimizes pricing (likely more commodity-price risk sharing), and finds other outlets for its recycled commodities.