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Waste Connections (WCN) |
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WIKI ANALYSIS
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. [1]
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.
Business Financials
WCN is divided into three service categories:
- Collection: WCN serves residential, commercial and industrial customers through operations in 22 states. These services are generally provided under governmental and municipal contracts, and customer subscriptions. Fees are assessed contractually based on route density, the frequency and level of service, the distance to the disposal or processing facility, the cost of disposal or processing, and market conditions. These fees are paid either by the municipalities from tax revenues or directly by the customers receiving the services. As of December 31, 2006, this category represented 64.2% of WCN's total revenues. [2]
- Disposal and Transfer: WCN owns and operates solid waste landfills to eliminate third party disposal costs, and thus realize higher margins. WCN also owns and operates transfer stations to further control the waste stream, improve equipment utilization, and develop relationships within markets to create opportunities for further growth. As of December 31, 2006, this category represented 27.6% of WCN's total revenues. [3]
- Recycling and Other: WCN owns or operates 26 recycling processing operations that provide services for a variety of recyclable materials. WCN also provides intermodal logistics in the Pacific Northwest by providing repositioning, storage, maintenance and repair of cargo containers for international shipping companies. As of December 31, 2006, this category represented 8.2% of WCN's total revenues. [4]
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. [6]
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. [9]
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:
Key Trends and Forces
- Increased Focus on Waste Reduction: The solid waste collection and disposal industry is significantly affected by the increasing national emphasis on recycling and other waste reduction programs, which prohibit or restrict the disposal in landfills of certain types of solid wastes. These measures reduce the volume of waste available for transport to and disposal in landfills. According to a Harris Interactive survey for Dow Corning, a majority of businesses worldwide see waste reduction as their most important environmental factor. Waste reduction was cited as a higher priority than developing environmentally friendly products or increasing energy efficiency. [11]
- Seasonality: The solid waste industry is subject to seasonal fluctuations in performance resulting from changing weather conditions. A lower volume of solid waste is generated during the cold months because of decreased construction and demolition activities during these months. Adverse weather conditions, such as greater precipitation, can also slow waste collection activities, resulting in higher operational costs. However, the months of June through November can positively affect performance, as construction activity may spike due to increased hurricane activity. [12]
- Governmental Regulation: The full spectrum of solid waste services are subject to extensive and continually changing federal, state and local environmental laws and regulations. The enforcement of these laws has become increasingly stringent because of greater public interest in protecting the environment. For example, the California Global Warming Solutions Act of 2006 imposed new restrictions on the maintenance of landfills, increasing operational costs for landfill owners. [13]
- Reduction or Deterioration in Rail Service: WCN's intermodal services are dependent on two major railroads: the Burlington Northern Santa Fe (BNI) and Union Pacific (UNP). Thus, a reduction in rail service to a particular market is likely to adversely affect WCN's ability to provide intermodal transportation services to customers. Given management's high expectations for this aspect of WCN's business, such an outcome would severely affect WCN's growth model. [14]
- Fuel Prices: In 2003, WCN entered into a fixed-price fuel supply contract to support its fleet of diesel trucks that significantly and positively impacted performance until its expiration in late 2005. Since this expiration, WCN has seen a dramatic rise in fuel costs as oil prices have soared. Further volatility in oil prices, combined with weakening regional economies, may prevent WCN from instituting price increases to match rising costs, thus resulting in lower operating margins. [15]
Competition
The solid waste services industry is highly competitive and is dominated nationally by three public players:
- Waste Management (WMI) provides collection, transfer, recycling, disposal and waste-to-energy services. WMI's customers include commercial, industrial, municipal and residential customers, other waste management companies, electric utilities and governmental entities. In fiscal 2006, it generated annual revenues of $13,363 Million.[16]
- Allied Waste Industries (AW) provides collection, transfer, recycling and disposal services for residential, commercial and industrial customers. In fiscal 2006, it generated annual revenues of $6,028.80 Million.[17]
- Republic Services (RSG) provides services in the domestic non-hazardous solid waste industry, including solid waste collection services for commercial, industrial, municipal and residential customers through 135 collection companies in 21 states. In fiscal 2006, it generated annual revenues of $3,070.60 Million.[18]
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.
Notes
- ↑ WCN 2007 Annual Report, Business, Page 1
- ↑ WCN 2007 Annual Report, Business, Pages 3 - 6.
- ↑ WCN 2007 Annual Report, Business, Pages 3 - 6
- ↑ WCN 2007 Annual Report, Business, Pages 3 - 6.
- ↑ WCN 2007 Annual Report, Management's Discussion and Analysis of Financial Conditions and Results of Operations, Page 30.
- ↑ Jagdeep S. Ghuman, Credit Suisse Initiation Report, August 27, 2007, Page 2.
- ↑ WCN 2007 Annual Report, Selected Financial Data, Page 24.
- ↑ WCN 2007 Annual Report, Management's Discussion and Analysis of Financial Conditions and Results of Operations, Page 26.
- ↑ WCN 2007 Annual Report, Management's Discussion and Analysis of Financial Conditions and Results of Operations, Page 27.
- ↑ WCN 2007 Annual Report, Quantitative and Qualitative Disclosures About Market Risk, Page 40.
- ↑ Business and the Environment. New York: Oct 2007. Vol. 18, Issue 10; Page 12.
- ↑ WCN 2007 Annual Report, Risk Factors, Page 16.
- ↑ WCN 2007 Annual Report, Business, Page 7.
- ↑ WCN 2007 Annual Report, Risk Factors, Page 17.
- ↑ WCN 2007 Annual Report, Management's Discussion and Analysis of Financial Conditions and Results of Operations, Page 26.
- ↑ Reuters. [1]
- ↑ Reuters. [2]
- ↑ Reuters. [3]
- ↑ WCN 2007 Annual Report, Selected Financial Data, Page 24; WMI 2007 Annual Report, Selected Financial Data, Page 22; AW 2007 Annual Report, Selected Financial Data, Page 22 ; stock:Republic_Services_(RSG)/Filing/10-K/2008/F3074920 RSG 2007 Annual Report, Selected Financial Data, Page 22.
References
- ↑ WCN 2007 Annual Report, Business, Page 1
- ↑ WCN 2007 Annual Report, Business, Pages 3 - 6.
- ↑ WCN 2007 Annual Report, Business, Pages 3 - 6
- ↑ WCN 2007 Annual Report, Business, Pages 3 - 6.
- ↑ WCN 2007 Annual Report, Management's Discussion and Analysis of Financial Conditions and Results of Operations, Page 30.
- ↑ Jagdeep S. Ghuman, Credit Suisse Initiation Report, August 27, 2007, Page 2.
- ↑ WCN 2007 Annual Report, Selected Financial Data, Page 24.
- ↑ WCN 2007 Annual Report, Management's Discussion and Analysis of Financial Conditions and Results of Operations, Page 26.
- ↑ WCN 2007 Annual Report, Management's Discussion and Analysis of Financial Conditions and Results of Operations, Page 27.
- ↑ WCN 2007 Annual Report, Quantitative and Qualitative Disclosures About Market Risk, Page 40.
- ↑ Business and the Environment. New York: Oct 2007. Vol. 18, Issue 10; Page 12.
- ↑ WCN 2007 Annual Report, Risk Factors, Page 16.
- ↑ WCN 2007 Annual Report, Business, Page 7.
- ↑ WCN 2007 Annual Report, Risk Factors, Page 17.
- ↑ WCN 2007 Annual Report, Management's Discussion and Analysis of Financial Conditions and Results of Operations, Page 26.
- ↑ Reuters. [4]
- ↑ Reuters. [5]
- ↑ Reuters. [6]
- ↑ WCN 2007 Annual Report, Selected Financial Data, Page 24; WMI 2007 Annual Report, Selected Financial Data, Page 22; AW 2007 Annual Report, Selected Financial Data, Page 22 ; stock:Republic_Services_(RSG)/Filing/10-K/2008/F3074920 RSG 2007 Annual Report, Selected Financial Data, Page 22.
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