Quest Resource (QRHC)

Waste and recycling services provider Quest Resource (NASDAQ:QRHC) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 5.8% year on year to $68.43 million. Its non-GAAP loss of $0.14 per share was significantly below analysts’ consensus estimates.

Company Overview

Recycling corporate waste to help companies be more sustainable, Quest Resource (NASDAQ:QRHC) is a provider of waste and recycling services.

Waste management companies can possess licenses permitting them to handle hazardous materials. Furthermore, many services are performed through contracts and statutorily mandated, non-discretionary, or recurring, leading to more predictable revenue streams. However, regulation can be a headwind, rendering existing services obsolete or forcing companies to invest precious capital to comply with new, more environmentally-friendly rules. Lastly, waste management companies are at the whim of economic cycles. Interest rates, for example, can greatly impact industrial production or commercial projects that create waste and byproducts.

Competitors of Quest Resource include Waste Management (NYSE:WM), Republic Services (NYSE:RSG), and Waste Connections (NYSE:WCN).

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Quest Resource grew its sales at an incredible 23.8% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Quest Resource’s recent performance shows its demand has slowed significantly as its revenue was flat over the last two years.

This quarter, Quest Resource missed Wall Street’s estimates and reported a rather uninspiring 5.8% year-on-year revenue decline, generating $68.43 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 9% over the next 12 months, an improvement versus the last two years. This projection is healthy and indicates its newer products and services will catalyze better top-line performance.

Quest Resource has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 17.5% gross margin over the last five years. That means Quest Resource paid its suppliers a lot of money ($82.47 for every $100 in revenue) to run its business.

This quarter, Quest Resource’s gross profit margin was 16%, marking a 3.3 percentage point decrease from 19.3% in the same quarter last year. Quest Resource’s full-year margin has also been trending down over the past 12 months, decreasing by 1.4 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Quest Resource was roughly breakeven when averaging the last five years of quarterly operating profits, inadequate for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, Quest Resource’s operating margin decreased by 6.5 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Quest Resource’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Quest Resource generated an operating profit margin of negative 11.9%, down 14.5 percentage points year on year. Since Quest Resource’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Quest Resource’s earnings losses deepened over the last five years as its EPS dropped 67% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Quest Resource’s low margin of safety could leave its stock price susceptible to large downswings.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Sadly for Quest Resource, its EPS declined by 75.6% annually over the last two years while its revenue was flat. This tells us the company struggled to adjust to choppy demand.

We can take a deeper look into Quest Resource’s earnings to better understand the drivers of its performance. Quest Resource’s operating margin has declined by 13 percentage points over the last two yearswhile its share count has grown 4.7%. This means the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q1, Quest Resource reported EPS at negative $0.14, down from $0.08 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Quest Resource’s full-year EPS of negative $0.26 will reach break even.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Quest Resource broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, we can see that Quest Resource’s margin dropped by 7 percentage points during that time. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s in the middle of a big investment cycle.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Quest Resource historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.7%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Quest Resource’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Quest Resource’s $75.66 million of debt exceeds the $1.43 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $10.9 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Quest Resource could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Quest Resource can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We were impressed by how significantly Quest Resource blew past analysts’ EBITDA expectations this quarter. On the other hand, its revenue missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 9.4% to $2.29 immediately following the results.

Updated: May 21, 2025 at 11:02 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Quest Resource.

We see the value of companies helping their customers, but in the case of Quest Resource, we’re out. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets.

Quest Resource’s P/E ratio based on the next 12 months is 6.4x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $5.50 on the company (compared to the current share price of $2.28).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.