The stock of Waste Connections (NYSE:WCN, 30-year Financials) gives every indication of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $118.19 per share and the market cap of $30.9 billion, Waste Connections stock appears to be fairly valued. GF Value for Waste Connections is shown in the chart below.
Because Waste Connections is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 5.6% over the past three years and is estimated to grow 12.24% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Waste Connections has a cash-to-debt ratio of 0.15, which is worse than 77% of the companies in Waste Management industry. GuruFocus ranks the overall financial strength of Waste Connections at 5 out of 10, which indicates that the financial strength of Waste Connections is fair. This is the debt and cash of Waste Connections over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Waste Connections has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $5.5 billion and earnings of $0.85 a share. Its operating margin is 16.39%, which ranks better than 72% of the companies in Waste Management industry. Overall, the profitability of Waste Connections is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Waste Connections over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Waste Connections is 5.6%, which ranks in the middle range of the companies in Waste Management industry. The 3-year average EBITDA growth rate is -2.6%, which ranks worse than 70% of the companies in Waste Management industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Waste Connections’s ROIC was 5.54, while its WACC came in at 5.54. The historical ROIC vs WACC comparison of Waste Connections is shown below:
In closing, the stock of Waste Connections (NYSE:WCN, 30-year Financials) appears to be fairly valued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 70% of the companies in Waste Management industry. To learn more about Waste Connections stock, you can check out its 30-year Financials here.
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