On today’s TSX Breakouts report, there are 25 stocks on the positive breakouts list (stocks with positive price momentum), and 35 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list. This company has a successful track record of reporting better-than-expected quarterly earnings results that sends the share price spiking higher. The company is set to report its second-quarter financial results on July 24, and given the strong industry fundamentals, the company may once again beat the Street’s expectations. Another positive is the company’s strong balance sheet. I would not be surprised if management announced a dividend increase along with its quarterly results. The stock has been a consistent outperformer and the share price remaining in an uptrend. The security highlighted today is Waste Connections Inc. (WCN-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
Waste Connections’ core business offers solid waste collection, solid waste disposal and transfer, and solid waste recycling services with operations across North America. Solid waste collection is the company’s largest business segment, representing 69 per cent of the company’s total revenue in 2017. The company operates in 40 U.S. states and six Canadian provinces.
There is seasonality in the company’s revenues. Historically, revenues are lowest in the winter months, or first quarter, and higher in the second and third quarters, after which, revenues scale back down in the fourth quarter.
The company has a solid track record of beating the Street’s quarterly earnings expectations. For the past six consecutive quarters, Waste Connections has reported better-than-expected earnings results with its share price spiking higher by 3 per cent or more during four out of the past six quarters.
On May 2, the company reported better-than-expected first-quarter earnings results. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) came in at US$356.9-million, surpassing the consensus estimate of US$353.7-million. Adjusted EBITDA margins increased 0.8 per cent to 31.3 per cent from 30.5 per cent reported during the same period last year, boosted higher largely due to price increases. The Chief Executive Officer Ronald Mittelstaedt commented on the positive pricing environment on the earnings call, “In the first quarter, solid waste price plus volume growth was 3.2 per cent, in-line with our overall expectations. Total price of 4.3 per cent exceeded our outlook for the quarter and increased 60 basis points sequentially from Q4 (fourth quarter).” Management indicated that adjusted free cash flow is on track to surpass its 2018 guidance of US$850-million. The company’s balance sheet has the financial flexibility to fund further acquisitions, additional share repurchases and future dividend increases. On the call, Mr. Mittelstaedt commented on acquisition growth, “We’ve signed or completed acquisitions with total annualized revenue of approximately US$165-million year-to-date, including three new market entries, and the pipeline for potential additional acquisitions exceeds what’s been completed so far in 2018.”
The company is scheduled to report its second-quarter financial results after the market closes on Tuesday July 24. The Street is anticipating the company will report EBITDA of US$396-million and earnings per share of 62 cents US. Management has guided to adjusted EBITDA of US$395 with EBITDA margins of approximately 32.2 per cent.
The stock is dual-listed trading on both the Toronto Stock Exchange and the New York Stock Exchange under the same ticker, WCN.
Returning capital to shareholders
The company pays its shareholders a quarterly dividend in U.S. dollars of 14 cents per share, or 56 cents per share yearly. This equates to an annualized dividend yield of approximately 0.7 per cent.
In July 2017, management announced a 17 per cent dividend increase, lifting the quarterly dividend to its current level of 14 cents US per share from 12 cents US.
Management is committed to its dividend. Since initiating the dividend in 2010, the company has announced seven dividend hikes, each one a double-digit increase. It would not surprise me if management announced an eighth dividend hike when the company reports its second-quarter financial results.
Management has been active in its share buyback program, repurchasing US$42-million worth of shares during the first quarter. Management’s 2018 objective is to repurchase between US$250-million and US$400-million worth of shares.
There are 14 analysts who actively cover this stock, of which 11 analysts have buy recommendations and three analysts have hold recommendations.
The 14 firms providing recent research on the company are as follows in alphabetical order: AltaCorp Capital, BMO Capital Markets, CIBC Capital Markets, First Analysis, Gabelli & Co., Goldman Sachs, Macquarie, Morningstar, Oppenheimer & Co., Raymond James, RBC Capital Markets, Stifel, TD Securities, and Veritas Investment Research.
Earlier this week, Brian Maguire, the analyst from Goldman Sachs, lifted his target price to US$84 from US$82.
In June, BMO Capital Markets’ analyst Devin Dodge also raised his target price to US$84 from US$82.
The company reports its financial results in U.S. dollars.
The Street is expecting EBITDA of $1.57-billion in 2018 and $1.7-billion the following year. The Street is forecasting earnings per share of $2.51 in 2018 rising to $2.79 in 2019.
Financial forecasts have been stable over recent months. For instance, three months ago, the consensus EBITDA estimates were $1.57-billion for 2018 and $1.66-billion for 2019. The consensus earnings per share estimates were $2.50 for 2018 and $2.78 for 2019.
According to Bloomberg, Waste Connections is trading at an enterprise value-to-EBITDA multiple of 14.2 times the 2019 consensus estimate, above its three-year historical average and near its peak multiple of approximately 15 times during this time period.
The consensus one-year target price is C$104.04, suggesting the stock price is fairly valued with limited upside based on current earnings estimates. However, the consensus target price could increase if the company reports strong second-quarter financial results that causes the consensus earnings estimates to increase.
Insider transaction activity
In May, numerous insiders were sellers in the market with several transactions noted below.
On May 30, David Hall, Senior Vice-President – Sales and Marketing, sold 15,078 shares at a price per share of US$77.459.
The prior day, Chief Tax Officer Matthew Black divested 5,000 shares at a price per share of US$75.94, trimming his portfolio position to 22,609 shares.
On May 24, James Little, Senior Vice-President – Engineering and Disposal, sold 3,000 shares at a price per share of US$76.282 with 22,709 shares remaining in his account.
On May 23, Steven Bouck, the company’s former President, sold 10,000 shares at a price per share of US$76.3077, trimming his portfolio’s holdings to 293,439 shares.
The share price is in a multi-year uptrend, making higher highs and higher lows. On Wednesday, the share price advanced 1.2 per cent, closing at a record high.
Year-to-date, the share price has rallied 14 per cent making it one of the top performers in the S&P/TSX composite industrials sector. The stock has a successful track record of outperforming the broader indices. For the past three calendar years, the stock has outperformed the S&P/TSX 60 Index (the large cap index) as well as the S&P 500 Index.
Looking at key resistance and support levels, the stock’s next major resistance level is around C$110. Looking at the downside, there is strong technical support level around C$100, near its 50-day moving average (at C$98.65). Failing that, there is major support around C$90, close to its 200-day moving average (at C$91.97).
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.