Waste Connections (NYSE: WCN) is a trash company that operates in the Western and Southern United States. WCN's goal is to own or operate the entire supply chain of solid waste management, from collection and transfer services to disposal and recycling services. Over the last decade, Waste Connections has expanded its operations from its original base in Washington D.C. to 140 locations across 23 states.
The company does not operate in highly competitive urban markets that are dominated by larger firms such as Waste Management, Allied Waste, and Republic Services. Instead, Waste Connections targets smaller markets with growing populations, aiming to get in early and control a majority of the waste disposal market in the area. Over 50% of Waste Connections' revenue comes from markets in which the company has exclusive agreements with local governments to dispose of trash. 
At the simplest level, Waste Connections' revenue is driven by two factors: pricing power and volume growth. On the pricing side, general economic conditions impact the rates the company charges, and oil prices are a significant cost for the company, which operates a fleet of trash trucks. On the volume side, waste reduction programs, government regulations, and competition from larger firms for acquisition targets affect Waste Connections' efforts to expand its customer base.
WCN is divided into three service categories:
WCN has seen strong revenue growth over the past five years mostly as a result of an acquisition-based strategy. As of August 27, 2007, Waste Connections has made over 200 acquisitions that have contributed to 70-90% of the firm's historical revenue growth. 
The following graph demonstrates WCN's revenue and operating income growth from 2002 - 2006:
WCN's revenue growth is largely determined by pricing and volume growth. Strong economic conditions have allowed WCN to raise prices and institute surcharges to overcome cost pressures that have arisen from competitive markets and higher input costs due to rising oil prices. WCN has not seen such sustained growth in volume, which is largely attributable to the difficulty of successfully completing acquisitions and effectively integrating acquired businesses.
The following graph demonstrates WCN's pricing and volume growth from 2004 - 2006:
Free Cash Flow is widely used by investors as a valuation and liquidity measure in the solid waste industry. Free cash flow is vital to WCN's strategy to drive shareholder value through acquisition-based growth and an aggressive share repurchase plan. From 2004 - 2006, WCN has sustained a consistently high level of free cash flow on a dollar basis, but cash flow as a percentage of revenue has declined. Management cites lower operating margins, resulting from higher fuel and insurance costs, as the primary reason behind this trend. 
The following graph demonstrates WCN's free cash flow (measured as net cash provided by operating activities less capital expenditures for property and equipment) from 2004 - 2006:
The solid waste services industry is highly competitive and is dominated nationally by three public players:
On a regional and local level, however, the industry is highly fragmented and is composed of thousands of small, privately-owned companies. WCN competes for collection, transfer and disposal volume based primarily on the price and, to a lesser extent, quality of its services. However, due to WCN's dominant market positions in secondary markets, it is able to act as a price leader and its exclusive contracts prevent competitive entry. Thus, WCN has enjoyed operating margins that are significantly higher than its larger competitors. It should be noted, however, that rising fuel costs have eroded WCN's operating margins over the past several years, especially after WCN's fixed-price fuel supply contract expired in late 2005.