Waste Connections Inc. (WCN) The Henry Fund March 9, 2016

The Henry Fund
Henry B. Tippie School of Management
Wallace King [[email protected]]
Waste Connections Inc. (WCN)
Stock Rating
Industrials – Waste Management Services
Investment Thesis
Waste Connections Inc. operates in a mature and competitive industry but the
firm has positioned itself well by pursuing less competitive rural markets that
allow it to leverage its scale and vertical integration to exert more pricing
power. Although industry growth will be slow, there has been a strong
movement toward consolidation and WCN is poised to capture more of
industry profits as it unfolds. We believe that WCN is a solid defensive holding
with some upside potential. We thus recommend a HOLD rating at this time.
Drivers of Thesis
 WCN’s large scale and vertical integration will provide it with a sustainable
long term competitive advantage over its rivals in the rural markets in
which it operates.
 The firm’s pending merger with BIN will improve profitability through
operating synergies and a significantly lower marginal tax rate. We forecast
that the firm’s effective tax rate will decrease from 39% to 27% and net
margins will rise 80 basis points over the next five years.
 A gradual recovery in oil prices starting in 2017 will lead to long term
growth in E&P revenue. We forecast that oil prices will exceed $50 per
barrel by 2018 thus sparking a recovery in drilling activity.
Risks to Thesis
 Energy prices could remain low for the long term, reducing expected
revenue from E&P waste and requiring WCN to write down additional
assets in the E&P space
 Potential synergies from the merger with BIN may not be realized and the
transaction may actually destroy shareholder value.
 More stringent regulations could potentially increase landfill operating
cost or reduce solid waste disposal volumes
Year
EPS
growth
2013
$01.58
20.61%
Earnings Estimates
2014
$01.87
18.35%
2015
$2.07
10.70%
2016E
$2.09
.97%
2017E
$02.44
16.87%
WCN
S&P 500
12 Month Performance
30%
2018E
$02.79
14.38%
20%
10%
0%
-10%
-20%
M
A
M
Source: Yahoo Finance
J
J
A
S
O
March 9, 2016
N
D
J
F
Target Price
Henry Fund DCF
Henry Fund DDM
Relative Multiple
Price Data
Current Price
52wk Range
Consensus 1yr Target
Key Statistics
Market Cap (B)
Shares Outstanding (M)
Institutional Ownership
Five Year Beta
Dividend Yield
Est. 5yr Growth
Price/Earnings (TTM)
Price/Earnings (FY1)
Price/Sales (TTM)
Price/Book (mrq)
Profitability
EBITDA Margin
Profit Margin
Return on Assets (TTM)
Return on Equity (TTM)
WCN
40
30
20
30.1
Hold
$70-$72
$70.54
$54.04
$45.78
$64.38
$44.81– 64.14
$63.90
$7.61
122.4
97.9%
0.76
0.9%
7.6%
31.10
30.10
2.72
2.36
33.1%
12.07%
4.93%
12.10%
Industry
26.0
10
12.1
0
P/E
Source: FactSet
10.3
ROE
14.0
Company Description
10.1
EV/EBITDA
Waste
Connections
Inc.
provides
nonhazardous municipal solid waste
collection, transfer and disposal services to
commercial and residential customers in
North America. The firm operates in 32
states and a pending merger with Progressive
Waste Solutions will expand the firm’s
geographic footprint to Canada. The firm is
headquartered in Woodlands, Texas however
its tax domicile is in Canada.
Important disclosures appear on the last page of this report.
EXECUTIVE SUMMARY
We have issued a market perform rating on Waste
Connections Inc. at this time as the company represents a
solid defensive holding. The waste management industry
has limited upside potential due to slow topline growth
and high competition, but waste collection and disposal
services remain a necessity. WCN has positioned itself well
to mitigate the industry’s high competition by targeting
rural markets where it has a strong competitive advantage.
WCN pending merger with Progressive Waste Solutions
(BIN) could potentially benefit the firm through
operational synergies and improved scale. If executed
properly WCN and BIN combined will allow the firm to
extend its competitive advantage in its targeted rural
markets.
The company’s key challenges are low inflation and
depressed oil prices which have limited price increases and
constrained revenue from the high margin E&P sector.
Solid Waste Collection
The bulk of Waste Connection’s revenue is generated from
solid waste collection services provided to residential and
commercial customers. WCN avoids large urban areas that
are served by its two largest competitors; Waste
Management Inc. and Republic Services Inc. WCN instead
targets rural areas that are served by small to midsized
private waste collectors. WCN’s main competitive
advantage over these rivals is that it possesses greater
scale due to its size and through being vertically
integrated. High levels of vertical integration mean that
the WCN controls its waste transfer stations and landfills
and thus are not at the mercy of third party landfill and
transfer station operators. Vertical integration lowers the
firm’s costs and allows WCN to beat rivals to municipal
contracts which are typically awarded to the lowest
bidder. WCN’s merger with BIN doubles its size and
provides it with more scale to execute its strategy.
COMPANY DESCRIPTION
Waste Connections Inc. is an integrated waste
management company founded in 1997 and
headquartered in Woodlands, Texas. WCN has historically
generated the bulk of its revenue through the collection
and disposal of nonhazardous municipal solid waste for
residential and commercial customers. However, during
the past 3 years treatment, recovery and disposal of E&P
waste has become a substantial source of revenue. The
firm also generates a small amount of revenue through
intermodal freight transport and sale of recycled
commodities.
Segment Revenue
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
2010
2011
2012
2013
2014
Intermodal and other
Solid waste recycling
E&P waste treatment, recovery and disposal
Solid waste disposal and transfer
Source: WCN 10K
Solid waste collection
2015
Solid waste generation rates have slowed considerably
over the past decade, and we do not see any catalyst that
will lead to a significant growth in per capita solid waste
generation rates in the future. We instead anticipate a
modest 3.8% CAGR for waste collection over the next five
years, driven primarily by WCN using its low cost, large
scale and high level of vertical integration to squeeze
smaller players in their rural markets, thus allowing the
firm to win more waste collection contracts. Near to
midterm revenue growth will also be driven by the strong
trend of consolidation in the industry which we anticipate
will continue to reduce price competition and allow WCN
to have more pricing power with customers. The steady
trend of municipal divestment of waste collection services
is also a tailwind which will bolster modest short term
growth. Municipal divestment presents a potential 25%
market for the industry to exploit. Municipalities has
Page 2
divested solid waste business at CAGR of 1.7% annually
since 1995, we anticipate that the trend will continue.1
In light of the foregoing we forecast that organic waste
collection revenue will grow modestly at a rate of 5% in
2016 declining linearly to a long run growth rate of 2% in
2020. Solid waste collection is a very mature market
segment and we expect that terminal long run growth in
waste generation and waste collection will slightly lag the
long run GDP growth at a rate of 2%
its landfill and transfer station supply and grow disposal
revenues at 7% in 2016 declining linearly to 3% in 2020.
E&P Waste Treatment
350,000
250,000
0
2010
2011
Disposal Tonnage
Source: WCN 10K 2015
10%
7.4%
6.6%
2012
2013
-
20%
15%
5000
2014
3
2.5
2
1.5
Growth rate
4.1%
2015
5%
0%
WCN operates a large network of solid waste landfills and
waste transfer stations which it uses to dispose of the
waste that it collects. WCN also earns revenue from
charging third party waste collectors to use its landfills and
transfer stations. Landfills and transfer stations require
large capital outlays and are a competitive advantage for
WCN, especially in the smaller rural markets in which the
firm operates. Supply of landfill space is low and has
steadily declined over the past three decades due in large
part to stringent regulation which increased landfill
operating costs. Low landfill supply is exacerbated by the
fact that new landfill approvals typically take over five
years and are usually fiercely protested by local groups
under “Not in My Backyard” grounds.
We anticipate that the environmentalism movement will
continue to lead to more stringent landfill regulation and
opposition, which will in turn limit landfill supply. WCN will
be at a competitive advantage relative to its peers because
of its existing landfill network, and scale. WCN’s smaller
rivals and other potential entrants will likely not have the
capital or scale necessary to make landfill operation
feasible. In the near to mid-term we expect WCN to exploit
24%
50,000
25%
15000
8.4%
3.5
319%
200,000
100,000
22.7%
10000
4
150,000
WCN Landfill Disposal Tonnage
20000
369%
300,000
Solid Waste Transfer & Disposal
25000
E & P Waste Revenue
1
-31% -40%
4%
5%
7%
0.5
9%0
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
E&P waste treatment, recovery and disposal
Source: WCN 10K
-0.5
-1
Growth rate
E&P waste was a significant driver of WCN earnings during
2013 & 2014 reaching a high of 14% of revenue in 2014,
with EBITDA margins of 49.5% compared to 32% for the
waste collection and disposal segments. Revenue from
E&P waste has since declined significantly due to low
drilling activity which was sparked by depressed oil prices.
The rig count chart below illustrates the precipitous fall off
in drilling activity over the past year.
WCN expected strong growth from E&P and consequently
they invested significantly in fixed assets to exploit the
space. They have since had to write down approximately
$494 Million in E&P assets.3
Page 3
We expect low oil prices will force drilling activity to
continue to contract into 2016 as US oil production
undergoes a right sizing process. we forecast that
improving global GDP as well as lower world oil supply will
see E&P revenue begin to recover slowly in 2017 and
steadily increase through to 2020. E&P is a WCN’s highest
margin business and their strategic investments during
E&P’s boom years make them the best positioned firm in
the space.
Recycling
WCN processes materials such as paper, plastics and
aluminum then sells them as recyclable commodities to
third parties primarily in Asia. Low commodity prices and
slowing demand in China has led to a sustained decline in
the price of these recyclable products. WCN’s recycling
revenue has thus fallen significantly over the past 3 years.
The falling price of oil has also made it cheaper to
manufacture plastics from petroleum than to recycle
plastic bottles.
WCN Recycling Revenue
140,000
120,000
0.1
0.05
5.0% 5.0%
3.0% 4.0%
0
100,000
80,000
60,000
-9.7%
40,000
20,000
-
-0.05
-14.6%
-15.0%
-17.4%
Solid waste recycling
-0.1
-0.15
-0.2
quarter was 532M also exceeding analyst consensus
estimates of 525M. The increase in revenue for 4Q 2015
was driven primarily by an 8% YoY increase in commercial
waste collection revenue. Landfill waste volumes on a
tonnage basis also increased 6% YoY driven primarily by
growth in construction and demolition (C&D) waste
volumes. Recycling revenue for the quarter contracted by
12% YoY due to low commodity prices for recycled
commodities. E&P waste also continued its precipitous
slide with a 46.4% decline due to continued contraction in
the energy exploration industry.3
Waste
Connections-Progressive
Solutions Merger
In January 2016, WCN and BIN announced an all-stock,
reverse merger transaction that would see WCN
shareholders receive 70 percent ownership of the
combined company, and BIN shareholders receiving the
remaining 30 percent. The new combined firm will trade
as Waste Connections but will now be domiciled in
Canada. This Merger is structured as an inversion and the
combined firm will benefit from Canada’s lower tax rate.
The deal would potentially reduce Waste Connection’s tax
rate from 40% to 27%. The combination continues the
trend of consolidation in the industry as firms continue to
seek economies of scale and integration. The merger
combined the 3rd and 4th largest players in the market. The
combined firm would have annual revenues of
approximately 4 Billion, however this is still dwarfed by the
market leaders Waste Management and Republic Services
that have annual sales of 14 and 8.8 billion respectively.7
Operational Synergies
Growth rate
Source: WCN 10K
We expect that recycling revenue will continue to contract
in 2016 as low demand from the global economy and China
keeps commodity prices low. We expect a slow global
recovery beginning in 2017 as well as right sizing in the oil
market to lead to a slow recovery in recycling revenue in
2017 through to 2020.
RECENT DEVELOPMENTS
Q4 2015 Earnings
WCN reported EPS of $0.49 for Q4 2015, beating the
consensus estimates of $0.47 by $0.02. Revenue for the
Waste
Source: WCN & BIN Investor Presentation
Page 4
We expect that WCN’s merger with BIN will provide it with
cost savings through improvements in operational
efficiency. WCN’s gross margin was approximately 55.5%
pre-merger and we forecast that it will be 59.6% postmerger. Management sees room to significantly improve
operational efficiency but we do not expect that gross
margins for the combined firm will approach pre-merger
levels in the near future. Given the lack of direct field
synergies we expect the two firms will experience some
growing pains, and it will take time to realize operational
efficiency savings. For that reason, we forecast a low
annual 20 basis point decrease in gross margins through to
2020. Additionally, we project that the firm’s gross margin
will continue to benefit from low diesel prices through to
2017 until oil prices begin to recover slowly.
SG&A
The management of WCN anticipates that the merger with
BIN will generate $50M in cost savings through SG&A in
2016. Although the firm will part ways with most of BIN
executive leadership, we believe that this figure is overly
optimistic. Given the large scale of the merger and the
complexities involved, we expect WCN to reap SG&A
benefits at a slower pace. Consequently, we forecast that
SG&A margin will decline by 5 basis points annually
through to 2020.
Taxes
WCN’s merger with BIN will be structured as a tax
inversion which will change the firm’s tax domicile from
the USA to Canada thus leading to a reduction in the firm’s
marginal tax rate from 39% to 27%. The firm’s lower tax
rate will significantly improve its future NOPLAT. Although
recent regulation has been proposed to crack down on
inversion transactions, we do not expect the firm’s merger
to be blocked. Consequently, we have assumed a marginal
tax rate of 27% from June 2016 onward in our valuation
models.
Dividends & Share Repurchases
Management has committed to paying out 20% of the
firm’s free cash flow in the form of an annual dividend. we
believe that management will have the capacity to stay
true to this promise given the firm’s dividend record as
well as its future outlook. The agreement to acquire BIN
was completed as an all stock purchase and increased the
firm’s number of shares outstanding from 123.492 to 174
million.3 Management has committed to reducing shares
outstanding by repurchasing 2-3% of outstanding shares
annually. Management has had a consistent repurchase
record, however, we believe the 3% repurchase rate would
be overly optimistic we forecast that a rate of 2% annually
would be more realistic.
INDUSTRY TRENDS
Consolidation
Over the past two decades there has been a wave of
consolidations and M&A activity within the industry as
firms seek to gain economies of scale to counter the capital
intensive nature of waste management. An additional key
driver of the push towards consolidation is the increased
pricing power achieved with scale. Larger firms are better
able to negotiate favorable contracts with municipalities
and large businesses. Despite the consolidation efforts the
waste management industry remains fragmented with
thousands of small to midsized medium players operating
regionally. As waste volumes and per capita waste
generation rates plateau, the industry has struggled to
achieve organic growth and thus M&A has emerged as the
primary growth strategy for firms. The EPA expects per
capita waste residential volumes to decrease and as the
USA shifts towards a more service based economy there
will be less industrial waste generated7.
In light of the foregoing, we expect that consolidation will
continue to be the primary growth strategy in the industry.
Larger players such as WCN, WM and RSG who have
healthier balance sheets and more experience integrating
acquisitions into their business will be able to grab a larger
share of industry revenue.
Vertical Integration
There has been a strong industry push towards vertical
integration as major players seek to control the collection,
transport and disposal of waste in the markets in which
they operate. Vertical integration allows firms to reduce
supplier power, which is primarily exercised in the form of
tipping fees paid to dispose of waste at both transport
stations and landfills. Ultimately, vertically integrated
firms are able to capture more the industry’s profits. The
Management of large players such as Waste Connections
have openly stated that they will rarely enter a new market
if they cannot achieve waste integration3. This trend has
led leading companies to strategically acquire firms that
Page 5
own transport stations or landfills before they enter the
new market. Given the slow top line industry growth we
expect the trend of vertical integration to continue as firms
seek to achieve economies of scale. Major players will also
use vertical integration in tandem with M&A to squeeze
smaller players out of the market.
Landfill Decline
Privatization of Waste Collection
Approximately 25% of all municipalities collect and
dispose of their own sold waste, this is down from 35% in
19951. This trend is expected to continue as municipalities
struggle with tight budgets and studies have shown that
privatized waste collections are cheaper.
MARKETS AND COMPETITION
The number of lands fills in the US has declined
substantially over the last 3 decades, from over 8000 in
1988 to under 2000 in 20151. The reduction in the number
of landfills was due in large part to the Resource
Conservation and Recovery Act (RCRA) which mandated
stringent and costly upkeep requirements for landfills. The
increased cost of landfills pushed firms to seek economics
of scale by making landfills larger so that they could spread
their fixed cost over more waste volumes. The industry
also shifted towards a larger network of transport stations
that would channel waste over greater distances to a
smaller number of landfills. Starting new landfills has also
become more prohibitive; there are large excavation
costs, strong opposition by communities and landfill
approvals typically take over 5 years.
The dynamics of landfill supply have given landfill owners
more pricing power and firms that control their own
landfills a competitive advantage. In addition to the
prohibitive costs to start new landfills, we expect landfill
supply to continue to decline as firms develop more
efficient ways to manage their current capacity. Larger
players are also better leveraging their transport stations
network to ship waste over larger distances instead of
setting up landfills in closer proximity.
The waste management industry is fragmented with
thousands of small to mid-sized regional players. These
small & mid-sized players compete aggressively on price
because there is not strong demand for differentiated
waste services. This price competition is exacerbated by
the fact that municipal contracts dominate the residential
waste collection space and these contracts are primarily
awarded to the lowest bidder. Municipal authorities
essentially bargain collectively on behalf of residents and
thus reduces the pricing power of industry players. This
dynamic has led firms to increase their size through
consolidation in an effort to increase their pricing power.
Supplier power in the industry is moderately strong,
because there are many players who collect waste but a
much smaller percentage actually own their own waste
disposal and transport services. Companies that are only
waste collectors must pay tipping fees to third parties.
Consequently, fully integrated firms have a competitive
advantage especially given the limited supply of landfill
space and the capital intensive nature of setting up a
transfer station network. The three major players have
continued their aggressive push to vertically integrate in
all their markets.
The firms in the industry have adapted to compete in
different ways. The large players; Waste Management,
Waste Connections and Republic services have avoided
head-to-head and costly price competition by targeting
non-overlapping markets. Waste Connections focuses on
less crowded regional markets while Waste Management
and Republic Services have targeted larger urban areas.
Waste Management has developed a large network of
transfer stations to transport waste out of these urban
areas. The three largest players have a large footprint and
are present in most states while the smaller regional
players typically compete in narrow geographic areas. The
common thread amongst the largest firms is a sustained
Page 6
push towards purchasing smaller competitors to achieve
more scale and pricing power.
The waste management industry is very mature. We
expect that long term top line growth will slightly lag GDP
and will primarily be driven by population increases. The
industry is highly fragmented but larger players have more
pricing power and thus take a larger share of industry
profits. This industry is not attractive for new entrants due
to the large capital requirements, regulatory burden, and
incumbent benefits. Incumbents in this industry benefit
from long term contracts with municipalities, most have
an average length of 3 to 5 years2. We do not anticipate
disruption to this industry from the entry of new players,
especially given the trend toward consolidation and the
competitive advantages of being integrated
#11 PSI Recycling Grade Paper Price per Ton
Peer Comparisons
70
1 Year Stock Price Chart
60
50
40
30
20
The chief substitute for waste disposal is recycling. We do
not anticipate that recycling will disrupt the market in the
near to mid-term because recycling rates have essentially
plateaued over the past 5 years despite increasing
attention to environmental sustainability. Recycling has
also become uneconomical due to lower commodity
prices. Recycling could become a greater threat if
regulation changes and states begin to mandate ‘zero
waste’ laws as observed in Europe. Waste to energy plants
are also a substitute for waste disposal however given the
low cost of oil we do not anticipate a significant growth in
waste to energy in the near to mid-term.
10
0
D-14
A-15
WCN
Source: Yahoo Finance
J-15
WM
O-15
RSG
J-16
BIN
M-16
As previously discussed, the waste management industry
is highly fragmented and regional in nature but there a
small handful of large players that operate on a national
scale, the three largest are: Waste Management Inc.,
Republic Services Inc. & Waste Connections.
Page 7
Waste Management’s exposure to urban areas is
beneficial, because Urban areas are more populated and
thus generate more solid waste and potential revenues.
Millennials also tend to favor urban environments and
there may be a significant population shift to these areas
in the future. The potential drawback however is that
crowded urban areas are more likely to be targeted for
recycling or zero waste laws than are rural areas, this could
reduce solid waste volumes in these areas. In the event
that more stringent recycling laws are passed, waste
management and republic would me more negatively
impacted.
Segment Revenue
120%
100%
80%
60%
40%
20%
0%
WM
Waste Collection
BIN
Recycling
Source: WCN, BIN, RSG & WM 10K
RSG
WCN
Waste Transfer & Disposal
Company
E&P & Other
While all three firms operate nationally, Waste
Connections focuses on smaller regional markets that are
less competitive while Waste Management and Republic
Services have more exposure to larger urban areas.
Despite lower revenues, Waste Connections has higher net
profit margins than the larger rivals. This superior profit
margin is due in large part to the improved pricing power
that the firm achieves by focusing on rural or regional
markets. Waste Management has the most transfer
stations because they channel a significant amount of
waste out of the urban markets in which they operate to
landfills in more distant areas.
Company
Waste Connections
MarketValue Sales EV/EBITDA 5 Year Sales Growth ROA ROE Net Margin
7,816.2 2,117.3 13.98x
60.4
4.93% 12.10% 12.07%
3.6
3.6% 13.4% 5.8%
16,081.3 9,115.0 8.96x
12.4
Progressive Waste Sol 3,341.8 1,925.6 10.14x
34.7
Republic Services
Waste Management Inc 25,544.8 12,961.0 10.19x
Source: WCN, BIN, RSG & WM 10K
Company # Employees Sales Per Employee # of Landfil s
Waste Management Inc. 42,700 0.29x
244
Republic Services
30,000 0.28x
193
Waste Connections
7,000 0.32x
62
Progressive Waste Solutions 7,800 0.24x
31
Source: WCN, BIN, RSG & WM 10K
3.7% 9.7% 8.2%
Waste
Connections
Republic
Services
Waste
Management
Inc
Progressive
Waste Sol
Total
Total
Current
Debt/Capital Debt/Equity
Ratio
EBIT/Interest
Expense
52.0%
108.3%
0.96
7.49x
49.3%
97.4%
0.67
4.21x
62.7%
168.0%
0.93
5.56x
57.9%
137.4%
0.92
3.71x
Source: WCN, BIN, RSG & WM 10K
All three firms have significant leverage and financial risk
as illustrated by their liabilities to asset ratios. Firms in this
industry are capital intensive and use leverage to fund
their fixed assets as well as mergers and acquisition
activities. Interest rates are expected to increase in the
near to mid-term and with it borrowing cost, therefore
firms that are highly levered may have difficulty accessing
capital to fund their growth. Waste connections is the
least levered of all the firms and would be in a better
position to access capital needed to purse a M&A strategy.
3.7% 10.6% 6.4%
# of Transfer stations
297
201
69
118
Organic top line growth in this industry has slowed
significantly as per capita solid waste generation rates
Page 8
have plateaued over the 5 years. This has lead firms to
pursue an acquisitions strategy for growth. These three
large firms are better positioned to succeed in this space
due in large part to being larger and having better access
to capital markets than their peers. The management
teams of these three largest firms are also more
experienced in acquiring and integrating new companies
than other players are. Each of these three firms typically
completes between 5 and 15 acquisitions each year345.
The outlook for both manufacturing and the industrials
sector is negative in the near to mid-term, this coupled
with stagnant residential solid waste growth, low inflation
and higher interest rates means that many of the
industry’s numerous small players struggle to compete
with larger vertically integrated firms. A depressed stock
market and lower valuations could see many attractively
priced firms available for big players.
Real GDP
ECONOMIC OUTLOOK
Source: EPA
Inflation
GDP is a strong indicator of economic activity and more
solid waste is generated when GDP growth is higher due
to increased consumer spending and commercial activity
in the economy. We anticipate that 2 year GDP growth will
be a moderately low 2.8%. GDP growth above this level
would spark more solid waste generation from
commercial and construction activity.
Housing Starts
New home construction generates (C&D) construction and
demolition waste. Housing starts are a strong driver of
collection and disposal revenue for WCN. We forecast that
housing activity will remain modest in near to midterm due
to the potential for a rise in interest rates as well as slow
wage growth due to low inflation.
US inflation rate has been persistently low over the last 3
years due in large part to the strong dollar and low oil
prices. Low inflation hurts firms in the waste management
industry because approximately half of WCN’s revenues
are tied to CPI index thus limiting price increases. We
anticipate that inflation will remain low, and we forecast a
2-year target rate of 1.7%, still below the Fed’s target rate.
A strong uptick in inflation would allow WCN to achieve
significant pricing and revenue gains.
Page 9
Interest Rates
Per capita municipal solid waste generation rates have
been stagnant over the past decade and given the public
focus on environmentalism we do not foresee a strong
catalyst for top line industry growth. Growth would thus
have to emerge from one of the specialty waste areas.
WCN’s chief growth catalyst will be an increase in oil prices
which would increase rig activity and E&P revenue. E&P is
WCN’s highest margin business and they are well
positioned in the space. Increasing oil prices would also
spark an increase in recycling revenue as prices for
recyclable plastics would increase. We expect that oil
prices above $55 would lead to a pickup in drilling activity.
A sustained period of low interest rates has fueled Industry
consolidation over the past decade and WCN has used
debt to fuel its M&A growth. We expect 10 year yields to
increase by 111 basis points within two years. If economic
conditions spur the fed to accelerate the rate increase,
then we will see a reduction in M&A activity for WCN and
the industry. A large rate increase would significantly limit
WCN’s ability to execute its growth strategy.
Population Growth
Oil prices are also tied to inflation and we believe that an
uptick in oil prices would increase inflation and allow WCN
to gain more revenue from its CPI tied contracts.
A secondary catalyst would be increased GDP and
construction activity which would boost C&D waste
volumes. We anticipate that GDP above the long run rate
of 2.8% and strong growth in housing starts will spark a
growth in revenues from C&D waste.
•



The US Census Bureau projects that the rate of population
growth will slow over the next 50 years. Population growth
has been a consistently strong driver of solid waste
generation and will thus constrain the industry’s growth
rate.

CATALYSTS FOR GROWTH
Page 10
INVESTMENT POSITIVES
WCN’s high level of vertical integration and large scale
gives it a strong competitive advantage over its smaller
rivals in the rural markets in which the firm operates.
The waste management industry is consolidating
steadily and larger players such as waste connections
will benefit.
WCN’s combination with BIN has the potential to reap
valuable synergies. This is buoyed by WCN’s long
history of integrating tuck in acquisitions into the
company.
Industry growth will be fueled through M&A and
WCN’s low debt levels and superior access to capital
markets relative to smaller rivals make them better
positioned to execute this strategy.
Historically WCN has generated strong free cash flow
and has had a consistent dividend payout rate. We
expect this to continue.
•
•
•
•
INVESTMENT NEGATIVES
Solid waste generation rates have slowed considerably
over the past decade. This will limit top line industry
revenue growth for the long term.
The waste management industry is highly fragmented
with over 20,000 players who compete primarily on
price.
WCN invested heavily in the high margin E&P segment
and a sustained downturn in oil prices could result in
more asset write-downs and lost revenue.
The Waste management industry is a frequent target
for regulation due to environmental concerns.
Changes in ‘zero waste laws’ or stricter landfill
regulations could potentially reduce WCN’s income.
VALUATION
We project that WCN’s total revenue will grow by 1.8% in
2016 before increasing to approximately 4.5% in 2017 &
2018 as rising oil and commodity prices spark a recovery in
E&P waste and recycling volumes. The waste management
industry is mature therefore long run growth will be driven
by economic activity and population growth. Accordingly,
we forecast that terminal growth in NOPLAT will be 2.0%,
which is in line with forecasts of long run real GDP growth.
we anticipate that the firm will incrementally realize the
operating synergies from the BIN merger during the five
year forecast horizon. Although WCN pursues several
acquisitions annually as part of its growth strategy we have
excluded possible M&A activity from this valuation model
and instead based earnings projections on solely on
organic growth.
We project that WCN’s capital expenditure will grow
modestly at 6% annually in order to support revenue
growth from the firm’s collection and disposal segments.
Improving waste collection efforts will require investment
in fixed assets such as trucks and increased waste disposal
revenue will require investment to improve landfill and
transfer station capacity to accommodate increasing
waste volumes.
We expect that WCN will slowly reap the synergies from
the BIN merger over the five year forecast horizon.
Consequently, we forecast that gross margins will improve
by 78 basis points over the next five years while
SG&A/Sales will fall by 20 basis points. We anticipate that
these effects will drive an 80 basis point improvement in
profit margins by 2020.
Pre-Tax cost of debt was determined by adding a liquidity
adjustment of .85% (the difference between the 30 and
10-year treasury rate) to the firm’s 3.41% 10-year bond
issued in 2015. This resulted in a pre-tax cost of debt of
4.26%. Beta was determined using the 3 years of weekly
data resulting in a WACC of 5.55%.
The DCF model determined a price of $70.54 while the
DDM model predicted a price of $54.83. we do not believe
that the DDM model accurately reflect the firm’s intrinsic
value because WCN’s payout policy is not consistent with
its earnings. Management’s has a conservative payout rate
because they expect to complete future acquisitions which
are not incorporated into this valuation model. The firm’s
relative P/E value based on its 3 main peers reflect a price
of $48.59. This price does reflect the firm’s intrinsic value.
we believe that WCN currently trades at a premium to its
peers because it faces less price competition in its rural
markets than its peers who operate in more competitive
markets. we believe that the price of 70.54 derived from
the DCF model best reflects the intrinsic value of WCN.
KEYS TO MONITOR
Oil prices and economic activity will be a key driver of near
to midterm term revenue growth. Oil prices above $50
should spark a strong recovery in the high margin E&P
segment and boost earnings. A strong uptick in GDP,
consumer spending and housing starts would trigger an
increase in solid waste generation rates. CPI should also
be monitored because approximately half of WCN’s
revenue is tied to the CPI index which has limited the
company’s ability to increase prices.
WCN is expected to continue to benefit from lower
industry competition due to consolidation therefore any
deterrent to this trend such as a sharp rise in interest rates
should be monitored.
Regulatory changes targeting recycling, solid waste
generation or disposal will impact top line growth
therefore it will be prudent to monitor any developments
in this area.
REFERENCES
1. S&P Capital IQ Industry Surveys: Commercial Services
and Supplies October 2015
2. IBIS World Waste Collection Services in the US 56211
Page 11
3.
4.
5.
6.
7.
8.
9.
Waste Connections Inc. 10K 2015
Waste Management Inc. 10K 2015
Republic Services 10K 2015
Waste Management Inc. 4Q earnings call
WCN and BIN Combination Investor Presentation
EPA Advancing Sustainable Materials Management
Bakerhughes.com-Rig Count Data
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
Page 12
Waste Connections Inc.
Revenue Decomposition
Fiscal Years Ending Dec. 31
Solid waste collection
Growth rate
Solid waste disposal and transfer
Growth rate
Solid waste recycling
Growth rate
E&P waste treatment, recovery and disposal
Growth rate
Intermodal and other
Growth rate
Less intercompany revenue
Total Revenue
Growth rate
2013
1,214,787
3.8%
352,482
14.1%
65,730
-9.7%
250,824
319%
44,972
-8.7%
2014
1,286,313
5.9%
381,310
8.2%
56,108
-14.6%
310,072
24%
45,363
0.9%
2015
1,374,056
6.8%
415,169
8.9%
46,368
-17.4%
215,373
-31%
66,321
46.2%
2015M
2,789,587
103.0%
768,147
85.0%
121,286
161.6%
242,573
13%
121,286
82.9%
1,928,798 2,079,166 2,117,287 4,042,879
16.1%
7.8%
1.8%
2016E
2,929,065.84
5.0%
821,917.30
7.0%
103,093.41
-15.0%
145,543.64
-40%
124,924.96
3.0%
2017E
3,060,873.80
4.5%
871,232.34
6.0%
106,186.22
3.0%
151,365.39
4%
128,672.71
3.0%
2018E
3,183,308.75
4.0%
914,793.96
5.0%
110,433.67
4.0%
158,933.66
5%
133,819.62
4.0%
2019E
3,278,808.01
3.0%
951,385.71
4.0%
115,955.35
5.0%
170,059.02
7%
140,510.60
5.0%
2020E
3,360,778.21
2.5%
979,927.29
3.0%
121,753.12
5.0%
185,364.33
9%
147,536.13
5.0%
4,124,545.16 4,318,330.45 4,501,289.65 4,656,718.69 4,795,359.07
2.0%
4.7%
4.2%
3.5%
3.0%
Waste Connections
Income Statement
Fiscal Years Ending Dec. 31
Revenues
Cost of operations
Selling, general & administrative expenses
Depreciation & amortization expense
Loss on prior office leases
Gain from litigation settlement
Impairments & other operating charges
Gain (loss) on disposal of assets
Operating income (loss)
Interest expense
Interest income
Gain (loss) on extinguishment of debt
Other income (expense), net
Other income,net
Income before income tax provision & minority interest
Minority interests
Income (loss) before income tax provision
Income tax provision (benefit)
Net income (loss)
Less: net income attributable to noncontrolling interests
Net income attributable to Waste Connections, Inc.
Weighted average shares outstanding - basic
Net income (loss) per share - basic
Cash dividends per common share
2012
1,661,618
2013
1,928,795
2014
2,079,166
956,357 1,064,819 1,138,388
197,454
212,637
229,474
193,584
243,864
257,944
9,902
3,551
4,091
(1,627)
(2,853)
316,147
394,720
449,269
53,037
773
1,220
1,993
265,103
73,579
(220)
(220)
320,921
64,674
1,067
1,067
385,662
121,172
1.31
0.37
123,598
1.58
0.42
124,215
1.87
0.48
105,443
159,660
(567)
159,093
124,916
196,005
(350)
195,655
152,335
233,327
(802)
232,525
2015
2015M
2016E
2017E
2018E
2019E
2020E
2,117,287 4,042,879 4,124,545 4,318,330 4,501,290 4,656,719 4,795,359
1,177,409 2,408,786 2,457,443 2,565,088 2,664,763 2,747,464 2,819,671
237,484
458,177
443,389
462,061
479,387
493,612
505,910
269,434
527,837
533,626
527,459
525,313
526,925
532,072
494,492
(61,532)
64,236
518
(126,286)
31,592
(94,694)
(1,070)
(95,764)
123,492
-0.78
0.54
3,682
494,492
11,279
161,184
121,452
518
2,723
6,992
1,012
50,977
(1,329)
49,648
(1,070)
48,578
174,000
0.28
690,087
157,507
795
763,722
155,996
3,176
831,826
154,350
7,307
888,718
154,633
12,044
937,705
94,453
17,271
533,375
176,547
356,828
(1,178)
355,650
170,520
2.09
0.56
610,902
202,209
408,694
(1,349)
407,345
167,110
2.44
0.61
684,783
226,663
458,120
(1,512)
456,608
163,767
2.79
0.65
746,128
246,968
499,160
(1,647)
497,512
160,492
3.10
0.69
860,523
284,833
575,690
(1,900)
573,790
157,282
3.65
0.78
Waste Connections Inc.
Balance Sheet
Fiscal Years Ending Dec. 31
Cash & equivalents
Accounts receivable, net
Deferred income taxes
Prepaid expenses & other current assets
Total current assets
Property & equipment, net
Goodwill
Intangible assets, net
Restricted assets
Other assets, net
Total assets
Accounts payable
Book overdraft
Accrued liabilities
Deferred revenue
Current portion of contingent consideration
Current portion of long-term debt & notes payable
Total current liabilities
Long-term debt & notes payable
Long-term portion of contingent consideration
Other long-term liabilities
Deferred income taxes
Total liabilities
Minority interests
Common stock & Additional paid-in-capital
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Total Waste Connections, Inc. equity (deficit)
Noncontrolling interest in subsidiaries
Restricted Shares
Total equity
2012
23,212
235,762
45,798
57,714
362,486
2,457,606
1,636,557
541,908
34,889
42,580
5,076,026
130,260
12,567
121,829
69,930
49,018
33,968
417,572
2,204,967
30,346
75,129
464,882
3,192,896
781,134
(6,165)
1,103,188
1,878,157
4,973
2013
13,591
234,001
41,275
39,638
328,505
2,450,649
1,675,154
527,871
35,921
46,152
5,064,252
105,394
12,456
119,026
71,917
30,840
5,385
345,018
2,067,590
24,710
77,035
501,692
3,016,045
797,321
(1,869)
1,247,630
2,043,082
5,125
2014
14,353
259,969
49,508
42,314
366,144
2,594,205
1,693,789
509,995
40,841
45,057
5,250,031
120,717
12,446
120,947
80,915
21,637
3,649
360,311
1,975,916
48,528
92,900
538,635
3,016,290
812,529
(5,593)
1,421,249
2,228,185
5,556
1,883,130
2,048,207
2,233,741
2,015
10,974
255,192
49,727
46,534
362,427
2,738,288
1,422,825
511,294
46,232
40,732
5,121,798
115,206
12,357
136,018
90,349
22,217
2,127
378,274
2,147,127
27,177
124,943
452,493
3,130,014
2015M
46,754
462,946
49,727
77,698
637,125
4,640,223
3,851,634
688,267
46,774
44,582
9,908,605
213,820
12,357
276,006
106,689
22,217
2,621
633,710
3,697,353
27,177
305,323
582,463
5,246,026
737,876 3,978,752
(12,171) (208,843)
1,259,495
898,547
1,985,200 4,668,456
6,584
6,584
(12,461)
1,991,784 4,662,579
2016E
2017E
2018E
2019E
2020E
186,852
429,843
708,454
1,015,936
1,383,957
472,298
494,488
515,438
533,236
549,112
60,065.72
72,553.97
87,638.64 105,859.56 127,868.79
79,267
82,992
86,508
89,495
92,160
798,483
1,079,876
1,398,039
1,744,527
2,153,097
4,586,597
4,567,939
4,581,954
4,626,717
4,700,633
3,851,634
3,851,634
3,851,634
3,851,634
3,851,634
642,383
599,557
559,587
522,281
487,462
47,719
49,961
52,078
53,876
55,480
45,483
47,619
49,637
51,351
52,880
9,972,297 10,196,586 10,492,927 10,850,385 11,301,186
218,139
228,388
238,064
246,285
253,617
12,607
13,199
13,758
14,233
14,657
281,581
294,811
307,302
317,913
327,378
108,844
113,958
118,786
122,888
126,546
6,821
38,450
38,450
1,469,883
1,469,883
627,992
688,805
716,360
2,171,201
2,192,081
3,661,887
3,623,246
3,629,894
2,217,197
2,248,232
311,491
326,125
339,943
351,681
362,151
663,011
754,697
859,063
977,861
1,113,088
5,264,380
5,392,874
5,545,259
5,717,940
5,915,552
3,978,752
(208,843)
943,886
4,713,794
6,584
(12,461)
4,707,917
3,978,752
(208,843)
1,039,680
4,809,588
6,584
(12,461)
4,803,711
3,978,752
(208,843)
1,183,636
4,953,545
6,584
(12,461)
4,947,668
3,978,752
(208,843)
1,368,413
5,138,322
6,584
(12,461)
5,132,445
3,978,752
(208,843)
1,621,602
5,391,511
6,584
(12,461)
5,385,634
Waste Connections Inc.
Cash Flow Statement
Fiscal Years Ending Dec. 31
Net income (loss)
Loss (gain) on disposal of assets
Loss (gain) on disposal of assets & impairments
Depreciation
Amortization of intangibles
Deferred income taxes, net of acquisitions
Amortization of debt issuance costs
Equity-based compensation
Interest income on restricted assets
Interest accretion
Excess tax benefit associated with equity-based compensation
Payment of contingent consideration recorded in earnings
Adjustments to contingent consideration not settled in cash
Accounts receivable, net
Prepaid expenses & other current assets
Accounts payable
Deferred revenue
Accrued liabilities
Other long-term liabilities
Net cash flows from operating activities
Payments for acquisitions, net of cash acquired
Proceeds from adjustment to acquisition consideration
Capital expenditures for property & equipment
Proceeds from disposal of assets
Change in restricted assets, net of interest income
Other cash flows from investing activities
Net cash flows from investing activities
Proceeds from long-term debt
Principal payments on notes payable & long-term debt
Payment of contingent consideration recorded at acquisition date
Change in book overdraft
Proceeds from option & warrant exercises
Excess tax benefit asociated with equity-based compensation
Payments for repurchase of common stock
Payments for cash dividends
Tax withholdings related to net share settlements of restricted stock units
Distributions to noncontrolling interests
Debt issuance costs
Proceeds from common stock offering, net
Net cash flows from financing activities
Net increase (decrease) in cash & equivalents
Cash & equivalents at beginning of year
Cash & equivalents at end of year
2012
159,660
1,627
169,027
24,557
29,689
1,993
17,289
(603)
4,000
(5,033)
1,549
(733)
2,761
180
7,835
2,529
416,327
2013
196,005
2,853
218,454
25,410
38,680
3,655
15,397
(386)
4,812
(3,765)
(5,059)
1,612
1,696
(26,993)
1,403
6,117
4,170
484,061
2014
233,327
8,239
230,944
27,000
31,031
3,085
18,446
(446)
5,076
(7,518)
(1,074)
(4,148)
(22,168)
(3,868)
10,173
8,571
5,759
2,791
545,220
(1,579,869) (64,156) (126,181)
18,000
(153,517) (209,874) (241,277)
2,741
11,019
9,421
2,983
(646)
(4,475)
(6,185)
(5,358)
(896)
(1,733,847) (251,015) (363,408)
1,647,000 327,600 432,500
(609,014) (493,560) (525,909)
(12,473) (23,941) (24,990)
398
(110)
(11)
4,057
2,464
3,375
5,033
3,765
7,518
(18,597)
(7,317)
(44,465) (51,213) (58,906)
(6,062)
(5,439)
(6,814)
(198)
(198)
(371)
(7,174)
(2,035)
(125)
369,584
1,328,089 (242,667) (181,050)
10,569
12,643
23,212
(9,621)
23,212
13,591
762
13,591
14,353
2015
(94,694)
518,657
240,357
29,077
(132,454)
3,097
20,318
(428)
6,761
(2,069)
(22,180)
17,348
(2,780)
(16,674)
4,377
8,217
69
576,999
(230,517)
(238,833)
2,883
(2,225)
(1,842)
(470,534)
1,489,500
(1,429,195)
(2,190)
(89)
572
2,069
(91,165)
(65,990)
(6,447)
(42)
(6,867)
(109,844)
(3,379)
14,353
10,974
Waste Connections Inc.
Cash Flow Statement
Fiscal Years Ending Dec. 31
Net Income
Depreciation
Change in deferred taxes
Accounts Receivable
Prepaid Expenses
Accounts Payable
Book overdraft
Accrued Liabilities
Deferred Revenue
Net cash flows from operating activities
Capital Expenditure
Change in intangibles
Change in restricted assets
Change in other Assets
Net cash flows from investing activities
Change in current portion of long term debt
Change in Long term debt
Change in other long term liabilities
Change in current portion of contingent consideration
Change in contingent consideration
Share Repurchases
Dividend
Net cash flows from financing activities
Net increase (decrease) in cash & equivalents
Cash & equivalents at beginning of year
Cash & equivalents at end of year
2016E
2017E
2018E
2019E
2020E
355,650
407,345
456,608
497,512
573,790
533,626
527,459
525,313
526,925
532,072
70,209
79,198
89,281
100,577
113,217
(9,352)
(22,190)
(20,950)
(17,798)
(15,876)
(1,569)
(3,724)
(3,516)
(2,987)
(2,664)
4,319
10,249
9,676
8,220
7,332
250
592
559
475
424
5,575
13,230
12,491
10,611
9,465
2,155
5,114
4,828
4,102
3,659
960,863 1,017,272 1,074,290 1,127,637 1,221,420
(480,000) (508,800) (539,328) (571,688) (605,989)
45,884
42,826
39,970
37,306
34,819
(945)
(2,242)
(2,117)
(1,798)
(1,604)
(901)
(2,137)
(2,018)
(1,714)
(1,529)
(435,961) (470,353) (503,492) (537,894) (574,303)
4,200
31,629
1,431,434
(35,466)
(38,640)
6,647 (1,412,697)
31,035
6,168
14,635
13,817
11,738
10,470
(22,217)
(27,177)
(214,139) (209,856) (205,659) (201,546) (197,515)
(96,173) (101,694) (106,992) (111,190) (123,086)
(384,804) (303,928) (292,187) (282,261) (279,096)
140,098
242,991
278,611
307,482
368,021
46,754
186,852
429,843
708,454 1,015,936
186,852
429,843
708,454 1,015,936 1,383,957
Waste Connections Inc.
Common Size Income Statement
Fiscal Years Ending Dec. 31
Revenues
Cost of operations
Selling, general & administrative expenses
Depreciation & amortization expense
Loss on prior office leases
Gain from litigation settlement
Impairments & other operating charges
Gain (loss) on disposal of assets
Operating income (loss)
Interest expense
Interest income
Gain (loss) on extinguishment of debt
Other income (expense), net
Other income,net
Income before income tax provision & minority interest
Minority interests
Income (loss) before income tax provision
Income tax provision (benefit)
Net income (loss)
Less: net income attributable to noncontrolling interests
Net income attributable to Waste Connections, Inc.
2012
100.00%
57.56%
11.88%
11.65%
0.21%
2013
100.00%
55.21%
11.02%
12.64%
0.51%
2014
100.00%
54.75%
11.04%
12.41%
0.20%
-0.10% -0.15%
19.03% 20.46% 21.61%
3.19% 3.81% 3.11%
0.05%
0.07%
0.12%
-0.01%
-0.01%
0.05%
0.05%
15.95% 16.64% 18.55%
6.35% 6.48% 7.33%
9.61% 10.16% 11.22%
-0.03% -0.02% -0.04%
9.57% 10.14% 11.18%
2015
100.00%
55.61%
11.22%
12.73%
0.00%
0.00%
23.35%
0.00%
-2.91%
3.03%
0.02%
0.00%
0.00%
0.00%
0.00%
0.00%
-5.96%
1.49%
-4.47%
-0.05%
-4.52%
2015M
100.00%
59.58%
11.33%
13.06%
0.00%
0.09%
12.23%
0.28%
3.99%
3.00%
0.01%
0.07%
0.17%
0.03%
0.00%
0.00%
1.26%
-0.03%
1.23%
-0.03%
1.20%
2016E
100.00%
59.58%
10.75%
12.94%
0.00%
0.00%
0.00%
0.00%
16.73%
3.82%
0.02%
0.00%
0.00%
0.00%
0.00%
0.00%
12.93%
4.28%
8.65%
-0.03%
8.62%
2017E
100.00%
59.40%
10.70%
12.21%
0.00%
0.00%
0.00%
0.00%
17.69%
3.61%
0.07%
0.00%
0.00%
0.00%
0.00%
0.00%
14.15%
4.68%
9.46%
-0.03%
9.43%
2018E
100.00%
59.20%
10.65%
11.67%
0.00%
0.00%
0.00%
0.00%
18.48%
3.43%
0.16%
0.00%
0.00%
0.00%
0.00%
0.00%
15.21%
5.04%
10.18%
-0.03%
10.14%
2019E
100.00%
59.00%
10.60%
11.32%
0.00%
0.00%
0.00%
0.00%
19.08%
3.32%
0.26%
0.00%
0.00%
0.00%
0.00%
0.00%
16.02%
5.30%
10.72%
-0.04%
10.68%
2020E
100.00%
58.80%
10.55%
11.10%
0.00%
0.00%
0.00%
0.00%
19.55%
1.97%
0.36%
0.00%
0.00%
0.00%
0.00%
0.00%
17.94%
5.94%
12.01%
-0.04%
11.97%
Waste Connections Inc.
Common Size Balance Sheet
Fiscal Years Ending Dec. 31
2012
1.40%
Cash & equivalents
14.19%
Accounts receivable, net
2.76%
Deferred income taxes
3.47%
Prepaid expenses & other current assets
21.82%
Total current assets
147.90%
Property & equipment, net
98.49%
Goodwill
32.61%
Intangible assets, net
2.10%
Restricted assets
2.56%
Other assets, net
305.49%
Total assets
7.84%
Accounts payable
0.76%
Book overdraft
7.33%
Accrued liabilities
4.21%
Deferred revenue
2.95%
Current portion of contingent consideration
2.04%
Current portion of long-term debt & notes payable
25.13%
Total current liabilities
132.70%
Long-term debt & notes payable
1.83%
Long-term portion of contingent consideration
4.52%
Other long-term liabilities
27.98%
Deferred income taxes
192.16%
Total liabilities
Minority interests
Common stock & Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Total Waste Connections, Inc. equity (deficit)
Noncontrolling interest in subsidiaries
Restricted Shares
Total equity
2013
0.70%
12.13%
2.14%
2.06%
17.03%
127.06%
86.85%
27.37%
1.86%
2.39%
262.56%
5.46%
0.65%
6.17%
3.73%
1.60%
0.28%
17.89%
107.20%
1.28%
3.99%
26.01%
156.37%
2014
0.69%
12.50%
2.38%
2.04%
17.61%
124.77%
81.46%
24.53%
1.96%
2.17%
252.51%
5.81%
0.60%
5.82%
3.89%
1.04%
0.18%
17.33%
95.03%
2.33%
4.47%
25.91%
145.07%
2015
0.52%
12.05%
2.35%
2.20%
17.12%
129.33%
67.20%
24.15%
2.18%
1.92%
241.90%
5.44%
0.58%
6.42%
4.27%
1.05%
0.10%
17.87%
101.41%
1.28%
5.90%
21.37%
147.83%
47.01% 41.34% 39.08% 34.85%
-0.37% -0.10% -0.27% -0.57%
66.39% 64.68% 68.36% 59.49%
113.03% 105.93% 107.17% 93.76%
0.30% 0.27% 0.27% 0.31%
113.33% 106.19% 107.43% 94.07%
2015M
1.16%
11.45%
1.23%
1.92%
15.76%
114.78%
95.27%
17.02%
1.16%
1.10%
245.09%
5.29%
0.31%
6.83%
2.64%
0.55%
0.06%
15.67%
91.45%
0.67%
7.55%
14.41%
129.76%
0.00%
98.41%
-5.17%
22.23%
115.47%
0.16%
-0.31%
115.33%
2016E
4.53%
11.45%
1.46%
1.92%
19.36%
111.20%
93.38%
15.57%
1.16%
1.10%
241.78%
5.29%
0.31%
6.83%
2.64%
0.00%
0.17%
15.23%
88.78%
0.00%
7.55%
16.07%
127.64%
0.00%
96.47%
-5.06%
22.88%
114.29%
0.16%
-0.30%
114.14%
2017E
9.95%
11.45%
1.68%
1.92%
25.01%
105.78%
89.19%
13.88%
1.16%
1.10%
236.12%
5.29%
0.31%
6.83%
2.64%
0.00%
0.89%
15.95%
83.90%
0.00%
7.55%
17.48%
124.88%
0.00%
92.14%
-4.84%
24.08%
111.38%
0.15%
-0.29%
111.24%
2018E
15.74%
11.45%
1.95%
1.92%
31.06%
101.79%
85.57%
12.43%
1.16%
1.10%
233.11%
5.29%
0.31%
6.83%
2.64%
0.00%
0.85%
15.91%
80.64%
0.00%
7.55%
19.08%
123.19%
0.00%
88.39%
-4.64%
26.30%
110.05%
0.15%
-0.28%
109.92%
2019E
21.82%
11.45%
2.27%
1.92%
37.46%
99.36%
82.71%
11.22%
1.16%
1.10%
233.00%
5.29%
0.31%
6.83%
2.64%
0.00%
31.56%
46.63%
47.61%
0.00%
7.55%
21.00%
122.79%
0.00%
85.44%
-4.48%
29.39%
110.34%
0.14%
-0.27%
110.22%
2020E
28.86%
11.45%
2.67%
1.92%
44.90%
98.02%
80.32%
10.17%
1.16%
1.10%
235.67%
5.29%
0.31%
6.83%
2.64%
0.00%
30.65%
45.71%
46.88%
0.00%
7.55%
23.21%
123.36%
0.00%
82.97%
-4.36%
33.82%
112.43%
0.14%
-0.26%
112.31%
Waste Connections Inc.
Value Driver Estimation
Fiscal Years Ending Dec. 31
EBITA
Revenue
minus COGS
minus SG&A
minus Depreciation & Amortization
Plus Implied Interest on Operating Leases
EBITA
Less Adjusted Taxes
Marginal Tax Rate
Income Tax Provision
Plus Tax Shield on Lease Interest
Plus Tax Shield on Interest Expense
Minus Tax on Interest Income
Minus Tax on Non-Operating Income
Plus Tax on Non Operating Losses
Adjusted Taxes
Plus Change in deferred taxes
NOPLAT
2012
2013
2014
39.50%
124,916
2,005
29,064
39.50%
152,335
1,974
25,546
87
(2,784)
153,287
41,333
300,597
Net Operating Working Capital
Plus Normal Cash (.86% of Sales)
Plus Accounts Receivable
Plus Prepaid Expenses & Other Current Assets
Minus Accounts Payables
Minus Accrued Expenses
Minus Deferred Revenue
Net Operating Working Capital
Plus Net Property , Plant & Equipment
plus Net Intangible Assets (Non Goodwill)
plus Capitalized PV of Operating Leases
Net Invested Capital
14,290
235,762
57,714
(130,260)
(121,829)
(69,930)
(14,253)
2,457,606
541,908
119,159
3,104,419
ROIC
NOPLAT
Beginning Invested Capital
ROIC
EP
Beginning Invested Capital
ROIC-WACC (5.2%)
EP
2015M
2016E
2017E
2018E
2019E
2020E
1,661,618
1,928,795
2,079,166
2,117,287
4,042,879
4,124,545
4,318,330
4,501,290
4,656,719
4,795,359
(956,357) (1,064,819) (1,138,388) (1,177,409) (2,408,786) (2,457,443) (2,565,088) (2,664,763) (2,747,464) (2,819,671)
(197,454)
(212,637)
(229,474)
(237,484)
(458,177)
(443,389)
(462,061)
(479,387)
(493,612)
(505,910)
(193,584)
(243,864)
(257,944)
(269,434)
(527,837)
(533,626)
(527,459)
(525,313)
(526,925)
(532,072)
2,538
5,076
4,997
4,460
5,833
9,884
9,769
9,730
9,760
9,855
316,761
412,551
458,357
437,420
653,912
699,971
773,492
841,556
898,477
947,560
39.50%
105,443
1,003
20,950
(305)
(787)
(760)
125,543
42,580
233,799
FCF
NOPLAT
minus Change in Invested Capital
FCF
2015
(421)
(1,616)
177,817
28,710
309,249
39.50%
31,592
1,762
25,373
(205)
(195,324)
(136,802)
(86,361)
487,861
39.50%
(1,329)
2,304
47,974
(205)
33.10%
176,547
3,271
52,135
(263)
27%
202,209
2,638
42,119
(858)
27%
226,663
2,627
41,675
(1,973)
27%
246,968
2,635
41,751
(3,252)
27%
284,833
2,661
25,502
(4,663)
(201,234)
(152,490)
129,970
936,372
231,690
70,209
538,490
246,108
79,198
606,582
268,992
89,281
661,845
288,103
100,577
710,952
308,333
113,217
752,444
13,591
234,001
39,638
(105,394)
(119,026)
(71,917)
(9,107)
2,450,649
527,871
117,290
3,086,703
14,353
259,969
42,314
(120,717)
(120,947)
(80,915)
(5,943)
2,594,205
509,995
104,684
3,202,941
10,974
255,192
46,534
(115,206)
(136,018)
(90,349)
(28,873)
2,738,288
511,294
136,914
3,357,623
34,769
462,946
77,698
(213,820)
(276,006)
(106,689)
(21,102)
4,640,223
688,267
232,011
5,539,399
35,471
472,298
79,267
(218,139)
(281,581)
(108,844)
(21,529)
4,586,597
642,383
229,330
5,436,781
37,138
494,488
82,992
(228,388)
(294,811)
(113,958)
(22,540)
4,567,939
599,557
228,397
5,373,353
38,711
515,438
86,508
(238,064)
(307,302)
(118,786)
(23,495)
4,581,954
559,587
229,098
5,347,143
40,048
533,236
89,495
(246,285)
(317,913)
(122,888)
(24,306)
4,626,717
522,281
231,336
5,356,027
41,240
549,112
92,160
(253,617)
(327,378)
(126,546)
(25,030)
4,700,633
487,462
235,032
5,398,097
233,799
1,922,227
12.16%
300,597
3,104,419
9.68%
309,249
3,086,703
10.02%
487,861
3,202,941
15.23%
936,372
3,357,623
27.89%
538,490
5,539,399
9.72%
606,582
5,436,781
11.16%
661,845
5,373,353
12.32%
710,952
5,347,143
13.30%
752,444
5,356,027
14.05%
233,799
1,182,193
(948,394)
300,597
(17,716)
318,313
309,249
116,237
193,012
487,861
936,372
154,683
2,181,776
333,178 (1,245,404)
538,490
(102,618)
641,107
606,582
(63,429)
670,011
661,845
(26,210)
688,054
710,952
8,884
702,068
752,444
42,070
710,374
1,922,227
3,104,419
3,086,703
3,202,941
3,357,623
5,539,399
5,436,781
5,373,353
5,347,143
5,356,027
6.61%
4.13%
4.47%
9.68%
22.34%
4.17%
5.61%
6.77%
7.74%
8.50%
127,089.66 128,260.64 137,896.41 310,055.34 749,979.36 230,980.04 304,769.08 363,552.96 414,115.06 455,114.19
Waste Connections Inc.
Weighted Average Cost of Capital (WACC) Estimation
Marginal tax rate
30 Yr Treasury rate
Equity Risk Premium
Beta
Cost of equity
Cost of debt
Shares Outstanding
Share price
Market value of equity
27%
2.63%
5%
0.76
6.43%
4.26%
174,000,000
62.8
10,925,460,000
Current portion of long term debt
Long term debt & notes payable
PV Operating leases
Market value of debt
Debt + Equity
Equity/(Debt+Equity)
Debt/(Debt+Equity)
2,621
3,697,353
232,011
3,931,985,150
14,857,445,150
0.74
0.26
WACC
5.55%
Waste Connections Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
Marginal tax rate
Beta
Cost of Equity
Cost of debt
CV Growth
CV ROIC
WACC
Fiscal Years Ending Dec. 31
DCF Model
NOPLAT
Beg IC
Ending IC
Change in Invested Capital
Free Cash Flow
ROIC
FCF
Terminal Value
PV FCF
Value of Operating Assets
plus Excess cash
plus Restricted Assets
plus Other Assets
minus Total Debt & Leases
minus Contingent Liabilities
Value of Equity
Shares outstanding
Intrinsic Value
EP Model
EP
NOPLAT
Beginning Invested Capital
ROIC-WACC
EP
Terminal Value
PV of EP
PV of Economic Profit
Beg IC
Value of Operating Assets
plus Excess cash
plus Restricted Assets
plus Other Assets
minus Total Debt & Leases
minus Contingent Liabilities
Value of Equity
Shares outstanding
Intrinsic Value
Today's Price
27%
0.76
6.43%
4.26%
2.00%
10%
5.55%
2016E
2017E
2018E
2019E
2020E
538,490
5,539,399
5,436,781
(102,618)
641107
9.72%
641,107
606,582
5,436,781
5,373,353
(63,429)
670011
11.16%
670,011
661,845
5,373,353
5,347,143
(26,210)
688054
12.32%
688,054
710,952
5,347,143
5,356,027
8,884
702068
13.30%
702,068
607,389
601,388
585,102
565,620
752,444
5,356,027
5,398,097
42,070
710374
14.05%
710,374
16,950,200
13,655,895
538,490
5,539,399
4.17%
230,980
606,582
5,436,781
5.61%
304,769
661,845
5,373,353
6.77%
363,553
710,952
5,347,143
7.74%
414,115
218,832
273,554
309,155
333,631
16,015,394
11,985
46,774
44582
3,931,985
27,177
12,159,573,218
174,000,000
69.88
10,475,995.22
5,539,399
16,015,394
11,985
46,774
44,582
3,931,985
27,177
12,159,573,218
174,000,000
69.88
71.04
752,444
5,356,027
8.50%
455,114
11,594,173
9,340,823
Waste Connections Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31
EPS
Key Assumptions
CV growth
CV ROE
Cost of Equity
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price
Dividends Per Share
Future Cash Flows
Discounted Cash Flows
Intrinsic Value
Todays Price
2016E
$
2.09 $
2017E
2.44 $
2018E
2.79 $
2019E
3.10 $
2020E
3.65
2.00%
10.91%
6.43%
0.56
0.61
0.65
0.530
0.537
0.542
$ 54.04
$ 55.07
18.44
$ 3.65
$ 67.26
0.69
0.78
0.540
52.42
Waste Connections Inc.
Relative Valuation Models
Ticker
WM
RSG
SRCL
Company
Waste Management
Republic Services
Stericycle Inc
WCN
Waste Connections Inc.
Implied Value:
Relative P/E (EPS16)
Relative P/E (EPS17)
PEG Ratio (EPS16)
PEG Ratio (EPS17)
Price
$56.04
$46.21
$115.54
EPS
2016E
$2.79
$2.15
$4.76
EPS
2017E
$2.98
$2.33
$5.64
Average
$62.79
$2.09
$2.44
$
$
$
$
45.78
48.04
73.83
78.86
P/E 16
20.1
21.5
24.3
22.0
P/E 17
18.8
19.8
20.5
19.7
30.1
25.8
Est. 5yr
EPS gr.
5.6
5.7
15.0
11.83
PEG 16
3.59
3.77
1.62
3.0
PEG 17
3.36
3.48
1.37
2.7
2.5
2.2
Waste Connections Inc.
Key Management Ratios
Fiscal Years Ending Dec. 31
2012
2013
2014
2015
2015M
2016E
2017E
2018E
2019E
2020E
Liquidity Ratios
Current Ratio (CA/CL)
Quick Ratio (Cash+ Receivables/CL)
Cash Ratio (Cash/CL)
0.87
0.62
0.06
0.95
0.72
0.04
1.02
0.76
0.04
0.96
0.70
0.03
1.01
0.80
0.07
1.27
1.05
0.30
1.57
1.34
0.62
1.95
1.71
0.99
0.80
0.71
0.47
0.98
0.88
0.63
Activity or Asset-Management Ratios
Receivables Turnover (Sales/Avg Receivables)
Fixed Asset Turnover (Sales/Avg. Net PP&E)
Financial Leverage Ratios
Debt Ratio (LT & ST Debt/Total Assets)
Debt to Equity (LT & ST Debt/Total Equity)
Interest Coverage (EBIT/Interest Expense)
8.07
0.85
8.21
0.79
8.42
0.82
8.22
0.79
0.44
1.19
5.96
0.41
1.01
5.36
0.38
0.89
6.95
0.42
1.08
-0.96
Profitability Ratios
ROE (NI/Avg Equity)
ROA (NI/Avg Assets)
Net Margin (NI/Revenue)
9.69%
3.79%
9.57%
9.95%
3.86%
10.14%
10.86%
4.51%
11.18%
Payout Policy Ratios
Dividend+ Share Repurchase Payout Ratio
39.5%
26.1%
28.4%
8.73
0.87
0.37
0.79
1.33
8.82
0.89
8.93
0.94
8.91
0.98
8.88
1.01
8.86
1.03
0.37
0.78
4.38
0.36
0.76
4.90
0.35
0.74
5.39
0.34
0.72
5.75
0.33
0.69
9.93
-4.53%
-1.85%
-4.52%
7.59%
3.58%
8.62%
8.57%
4.04%
9.43%
9.36%
4.41%
10.14%
9.87%
4.66%
10.68%
10.91%
5.18%
11.97%
-166.0%
87.3%
76.5%
68.5%
62.9%
55.9%