Waste Connections (WCN)

Waste management company Waste Connections (NYSE:WCN) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 7.5% year on year to $2.23 billion. Its GAAP profit of $0.93 per share was 2.4% below analysts’ consensus estimates.

Company Overview

Operating a network of municipal solid waste landfills in the U.S. and Canada, Waste Connections (NYSE:WCN) is North America's third-largest waste management company providing collection, disposal, 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.

Waste Connections competes primarily with other large publicly-traded waste management companies including Waste Management, Inc. (NYSE: WM), Republic Services, Inc. (NYSE: RSG), and GFL Environmental, Inc. (NYSE: GFL). In its E&P waste business, competitors include Clean Harbors, Inc. (NYSE: CLH) and various regional private companies.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Waste Connections’s sales grew at an impressive 10.5% compounded annual growth rate over the last five years. Its growth beat the average industrials company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Waste Connections’s annualized revenue growth of 10.3% over the last two years aligns with its five-year trend, suggesting its demand was predictably strong.

This quarter, Waste Connections grew its revenue by 7.5% year on year, and its $2.23 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 6.4% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Waste Connections’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 40.8% gross margin over the last five years. That means Waste Connections only paid its suppliers $59.19 for every $100 in revenue.

Waste Connections produced a 42% gross profit margin in Q1, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Waste Connections has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.1%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Waste Connections’s operating margin rose by 4.1 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Waste Connections generated an operating profit margin of 17.5%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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.

Waste Connections’s EPS grew at a weak 1.9% compounded annual growth rate over the last five years, lower than its 10.5% annualized revenue growth. We can see the difference stemmed from higher interest expenses or taxes as the company actually grew its operating margin and repurchased its shares during this time.

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.

For Waste Connections, its two-year annual EPS declines of 14.4% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q1, Waste Connections reported EPS at $0.93, up from $0.89 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects Waste Connections’s full-year EPS of $2.43 to grow 100%.

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.

Waste Connections has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 15.2% over the last five years.

Taking a step back, we can see that Waste Connections’s margin dropped by 2.9 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Waste Connections’s free cash flow clocked in at $329.1 million in Q1, equivalent to a 14.8% margin. This cash profitability was in line with the comparable period last year and its five-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Waste Connections has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.8%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

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. On average, Waste Connections’s ROIC increased by 1.3 percentage points annually over the last few years. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

Waste Connections reported $111.2 million of cash and $8.68 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.96 billion of EBITDA over the last 12 months, we view Waste Connections’s 2.9× net-debt-to-EBITDA ratio as safe. We also see its $159.7 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Waste Connections meet analysts’ revenue expectations this quarter. On the other hand, its EPS missed. Overall, this was a weaker quarter. The stock remained flat at $196.57 immediately after reporting.

Updated: July 11, 2025 at 12:15 AM EDT

Before making an investment decision, investors should account for Waste Connections’s business fundamentals and valuation in addition to what happened in the latest quarter.

There are some positives when it comes to Waste Connections’s fundamentals. First off, its revenue growth was impressive over the last five years. And while its relatively low ROIC suggests management has struggled to find compelling investment opportunities, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. On top of that, its expanding operating margin shows the business has become more efficient.

Waste Connections’s P/E ratio based on the next 12 months is 33.7x. This valuation tells us that a lot of optimism is priced in. Add this one to your watchlist and come back to it later.

Wall Street analysts have a consensus one-year price target of $210.71 on the company (compared to the current share price of $182.01).