5,000% Returns: Why One Man’s Trash Firm Could Be Your Stock Treasure

5,000% Returns: Why One Man’s Trash Firm Could Be Your Stock Treasure
Theodora Lee Joseph, CFA

10 months ago5 mins

  • Waste Connections is a $36 billion company and one of the biggest players in the unglamorous business of providing waste collection, transfer, disposal, and recycling services to customers in North America.

  • The company has made 5,000% returns over the past two decades, and some of its peers in the waste industry have done similarly well.

  • Continued industry consolidation will be key to the company and the industry, unlocking further value and compounding returns.

Waste Connections is a $36 billion company and one of the biggest players in the unglamorous business of providing waste collection, transfer, disposal, and recycling services to customers in North America.

The company has made 5,000% returns over the past two decades, and some of its peers in the waste industry have done similarly well.

Continued industry consolidation will be key to the company and the industry, unlocking further value and compounding returns.

Mentioned in story

If you’d invested $1,000 in Waste Connections (WCN), a solid-waste management company, 25 years ago, you’d be sitting on a pile of cash worth $50,000 now. This $36 billion firm is the third-biggest (but arguably the best-looking) company in the unglamorous business of providing waste collection, transfer, disposal, and recycling services to customers across North America. It’s not every day you find a 50-bagger stock (in the trash, as it were), so I decided to take a close look at this company and its industry, to see whether its performance is sustainable…

Who knew garbage could be so gold?

Exactly. Waste Connections is the third-biggest solid waste services company in North America, alongside peers Waste Management (WM), Republic Services, and GFL Environmental (GFL). Collectively, the four top players control 56% of US landfill industry volumes and 45% of solid waste collection market share.

Indexed performance of three biggest North American waste management companies versus the S&P 500. The waste companies’ index was created with an equal weighting of Waste Connections (WCN), Waste Management (WM), and Republic Services (RSG). Source: DataStream.
Indexed performance of three biggest North American waste management companies versus the S&P 500. The waste companies’ index was created with an equal weighting of Waste Connections (WCN), Waste Management (WM), and Republic Services (RSG). Source: DataStream.

Now, apart from the fact that it operates in an attractive industry, WCN also has a strategy that’s made it one of the most profitable players in waste management. Here are five things that make it a winner:

1. It’s a major player in a consolidating industry.

The waste industry market structure may not look as attractive as, say, industrial gases, but it’s certainly getting sexier as its companies consolidate. Since they compete on price, having scale is a good thing: it helps drive costs down. The chart below shows how the market is split between activities and participants. In the biggest segment – collection (in blue) – about one-third of the market is still dominated by a long list of private companies. I’d bet that WCN has its eye on those. As the No. 3 player in this space and armed with a healthy balance sheet, it’s in a prime position to continue growing through acquisitions. And it’s not likely to have to fend off any new rivals as it does so: the waste management industry is highly regulated and capital intensive, so it doesn’t get a lot of newcomers.

Market share breakdown, in billions, by service and company type. Source: Waste Business Journal.
Market share breakdown, in billions, by service and company type. Source: Waste Business Journal.

2. It’s got a good plug-and-play acquisition strategy.

WCN has a record of making “tuck-in” acquisitions: basically, it’s bought smaller competitors and integrated them into its own operations to extract greater value and cost savings. Since 2006, the company has spent the majority of its cash on acquisitions and that’s been a strong driver for WCN’s improving margins over time.

WCN’s free cash flow spending, by activity (2006-2022). Source: WCN.
WCN’s free cash flow spending, by activity (2006-2022). Source: WCN.

3. It’s got high pricing power because of its niche focus.

Because the waste industry is a commoditized market, companies compete on price and returns are lowest in more populated cities. However, WCN chooses to compete primarily in secondary and rural markets where route density is lower (meaning it’s less profitable on a per-ton basis), but where customer churn is lower. Its dominance in those places gives it higher pricing power.

4. It’s got long-term contracts that allow for inflation pass-through.

WCN also has a huge franchise exposure – it’s up to 40% of its business – where the company serves as the exclusive provider of collection services in a certain region. Many of its franchise contracts are long-term (lasting up to 15 years), with prices that are typically tied to local consumer price indexes – that means it can pass along the costs of rising inflation to the customer. So even when volumes slow down, WCN is often still able to grow faster than inflation.

Price increases on the company’s contracts, by percentage, by year. Source: WCN.
Price increases on the company’s contracts, by percentage, by year. Source: WCN.

5. It’s got top-class management.

WCN’s current CEO is also its founder: Ronald J. Mittelstaedt stepped down in 2019 but was recently reappointed to the top job. He oversaw the company’s growth from its small-cap roots to the multibillion-dollar company it is today and implemented all the necessary strategic steps it needed to get there. Operationally, the waste management business is a local one – and WCN’s decentralized structure allows decision-making authority to be closer to the customer’s trash bins. This is important, as it allows the company to react more quickly to local competition and hit its local targets.

How does this affect the bottom line?

WCN’s industry position, long-term contracts, and high pricing power mean that it can command and sustain industry-leading margins. It has consistently delivered earnings before interest, taxes, depreciation, and amortization (EBITDA) margins of 30% and higher, even during the catastrophic 2008-09 global financial crisis. And it expects margin growth again this year, despite the current inflationary environment.

EBITDA margins by company over time. Source: Company data.
EBITDA margins by company over time. Source: Company data.

WCN also has one of the highest cash conversion ratios in the industry. This ratio measures how much of a company’s earnings is converted to cash, and provides an indication as to the earnings quality of the firm. The higher the ratio, the better the earnings quality.

Cash conversion by company over time. Source: Company data.
Cash conversion by company over time. Source: Company data.

So, then, what could go wrong?

The waste industry is still in its early phases of maturity, and as consolidation increases, the industry will only get more interesting. Now, WCN has already made 5,000% returns over the past two decades, and there’s no reason to believe returns couldn’t continue compounding as the industry matures. Longer term, environmental, social, and governance (ESG) factors may add another attractive aspect to investing in waste companies. After all, the sector fits with four of the 17 UN development goals: good health and well-being, clean water and sanitation, sustainable cities and communities, and climate action.

That said, higher interest rates could slow the pace of any consolidation-driven mergers or acquisitions WCN might attempt. And since the majority of WCN’s contracts are priced in line with local inflation index rates, any dislocation between those levels and the company’s cost profile could negatively impact profitability.

If the waste management industry is something you’d consider investing in, you can invest in the big players directly or via an ETF like the VanEck Environmental Services ETF (ticker: EVX, expense ratio: 0.62%). Although it’s worth noting that three largest waste management companies have a weight of only 31% in the fund.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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