Waste industry companies have historically offered both value and growth opportunities. For well-managed companies, strategically exploited opportunities can deliver exceptional results. By looking at specific stocks in the sector, it is glaringly obvious that even those businesses that are performing at high levels, not all are appraised equally, with inconsistent valuation metrics recorded across the board. To demonstrate the inefficiencies and to highlight an investment opportunity, a comparison between Meridian Waste Solutions (MRDN, Financial) and two of the industry giants, Waste Management (WM, Financial) and Waste Connections (WCN, Financial), is lined to determine which stock may offer the greatest value opportunity at current levels.
Meridian Waste Solutions
At $2.72 a share, Meridian stock may very well represent a compelling bargain, especially when one considers the difference in valuation metrics from that of Waste Management and Waste Connections, which currently enjoy a 50% premium in revenue and EBITDA multiple's over Meridian. The question begs, why? So, before I get beat up by the large-cap hawks, let me substantiate that comment.
Active investors should already be well aware of the price inefficiencies in the marketplace. They live it on a daily basis. Just like other sectors in the market, these inequalities are glowingly apparent in the waste industry, with no shortage of crowd favorites emerging among the listed companies. But playing crowd favorites over substance can be costly, and in the case of ignoring Meridian, it may present a wasted opportunity for making money.
First off, let us begin with the fact Meridian is already well on its way to becoming a powerful regional player in the waste space, acquiring an impressive asset base that has led to steady increases in its customer acquisition rates, with expectations of 10% compounded growth over the next several years. Already recording annual run-rate revenue of approximately $63 million, Meridian is well beyond that initial start-up stage whereby investors are rightfully cautious. In fact, combining the over $80 million credit facility in place from Goldman Sachs Specialty Lending Group to the impressive and recurring revenue growth, some of that overt caution may already be overcooked.
Meridian currently serves over 118,000 residential, commercial, industrial and government customers, supported by a fleet of over 130 trucks that operate throughout the Missouri and Virginia markets. From this growing number of clients, over 80% of them are on an annual contract basis, which provides strong revenue visibility to facilitate the company's planned growth strategy during the next 24 months. In addition to the capital assets named, Meridian owns transfer stations, three solid waste landfills and a recycling facility that is also contractually enhanced by municipal and subscription customers.
From an analytical perspective, with Meridian’s enterprise value of less than $100 million, the markets are almost entirely ignoring the fact that unlike Waste Management and Waste Connections, it is in aggressive growth mode, benefiting from both double-digit organic growth as well as from its acquisition strategy. Not only is Meridian generating robust company-wide growth, but the company is also EBIDTA positive to the tune of $13 million. Thus, it is a head scratcher when comparing the valuation metrics, with Meridian given a revenue multiple of only 1.6 times and an EBITDA multiple of only 7.8 times.
For comparison purposes, Waste Management has a current revenue multiple of 3 times and an EBITDA multiple of 10.9 times. Waste Connections is given a revenue multiple of 6.2 times and an EBITDA multiple of 19.5 times. For those keeping score, the average multiple for the entire industry is 3.1 times revenue and 12.4 times EBITDA. Clearly, Meridian's growth is going unnoticed at a time when it should be receiving greater attention, not less.
The case for Meridian is that while competitors are maturing, it is in growth mode, fortified with access to sizable amounts of capital. The company boasts respectable operating gross margins of 27%, with organic growth expected to continue at a 10% pace per year. The growth strategy keeps Meridian in active pursuit of accretive acquisitions, several of which the company has already publicly discussed. Management has guided toward additional tuck-in acquisitions and geographical expansion roll-ups to have a national footprint and deliver improved profitability. The growth initiatives have proven successful in driving service revenue to a base of over 118,500 residential customers and over 5,000 commercial customers, with additional traction expected through acquisition and organic growth. The growth and acquisition strategy will be adequately funded, utilizing an $89.1 million financing facility led by Goldman Sachs Specialty Lending Group.
Taking into account Meridian is in growth mode, has non-dilutive capital at hand and is successfully capitalizing on its strategic mission, it may only be a short matter of time before the stock is rightfully and efficiently valued, bringing near-term opportunities to investors that are attracted to growth-oriented stocks. As a value pick, Meridian is an emerging and potentially powerful waste service provider and, if properly appreciated, represents a potential triple-digit percentage gain from current levels.
Waste Management
Waste Management appears to be a good company to work for, voted the 2017 Most Ethical Company by the Ethisphere Institute. But is its code of ethics worthy of such high valuations? Waste Management has traded in a relatively wide range, trading from a 52-week low of $56.05 to a high of $73.90, closing most recently at $73.11, just shy of the yearly peak.
Waste Management has a revenue multiple of roughly 3 times and an EBITDA multiple of approximately 10.9 times. During its most recent quarter, the company recorded revenue growth of 6.6% and increased its yearly revenue by 5% on a year-over-year basis. Net income grew 23% on an adjusted basis. While the numbers are strong, do they correspond to making an investment into Waste Management over Meridian? I think not, unless you like to ride on large, fully-loaded steamships instead of speed boats. In other words, investing in Waste Management may offer a slow ride, susceptible to market dynamics and uncertain trends.
Unlike the double-digit momentum recorded at Meridian, Waste Management's internal revenue growth from yield for collection and disposal operations was 2.1% in the reported quarter and 2.4% for fiscal 2016. On the solid waste side, internal revenue growth from volume was 1.7% in fourth-quarter 2016, an improvement from approximately no growth in the same quarter a year ago. During fiscal 2016, the company's traditional solid waste internal revenue growth from volume was 1.6%, a considerable improvement of 210 basis points versus the year-ago comparable period. Total company internal revenue growth from volume, which includes recycling and renewable energy, was 2.0% in fourth-quarter 2016, up 290 basis points on a year-over-year basis. Total company volume was 1.4% for fiscal 2016, an improvement of 300 basis points compared to the year-ago period. Internal revenue growth from yield on the collection and disposal business is expected to be approximately 2.0%. Internal revenue growth from volume is expected to be between 1.2% and 1.6%. Furthermore, since the start of the year, shares of the Waste Management have gained 2.96%. The stock is trading at a price-earnings (P/E) ratio of 27.56 and has a dividend yield of 2.33%.
So the behemoth looks healthy, and that bodes well for the smaller players as well. For the "80 something," dividend-minded investors, the 2.33% yield may be attractive, however, with the share price hitting a bit of resistance at these levels, capturing a 2.33% yield while potentially giving up 20% of equity value is a real concern. Growth at Waste Management is similar to many mature companies; 1% to 4% growth, steady revenue increases and increased profit due to financial engineering, job cuts, share buybacks and spinoffs. While Waste Management is worthy of investment, is it a better investment consideration over Meridian at these levels? If you are an investor that likes to watch paint dry, yes. If you agree that high growth will ultimately define a share price, then no.
Waste Connections
Waste Connections stock is currently trading at a price of $87.48, hovering around its 52-week high of $88.59 and off the low of $59.92 a share. The stock has a revenue multiple of roughly 6.2 times and an EBITDA multiple sitting at approximately 19 times. Each of these valuations is almost triple that of Meridian.
Shares of Waste Connections have increased by over 7% on the year and, like Waste Management, the company reported respectable but relatively small growth percentage increases during 2016. Even with encouraging guidance given for 2017, with small percentage increases in both revenue and net income expected, the share price may be fully valued at current levels. After a 36% increase in 2016, and with price resistance at current levels, susceptibility to downside pressure may be more in vogue for the stock in the near term. This prognostication is not without trepidation because Waste Connections did perform well.
From the company filing for the year ended Dec.31, 2016, revenue was $3.376 billion, as compared to revenue of $2.117 billion in 2015. Operating income, which included $118.3 million of items primarily related to the Progressive Waste acquisition and $27.7 million of impairments and other items, was $452.3 million, compared to operating loss of $61.5 million in the prior year. In 2015, the company recorded net impairment charges of approximately $497.1 million against its E&P segment.
Waste Connections remains well positioned to continue to capitalize on industry opportunities with a strong balance sheet and proven management. In comparison, once again I see Waste Connections as approaching full value for 2017, and Meridian being the stock to continue to ride the wave higher. No disrespect to Waste Connections, it is doing well. My grandfather loves them too.
A healthy industry supports all
The solid news out of both Waste Management and Waste Connections bodes well for Meridian in 2017. Industry strength trickles down, and with Meridian extremely well positioned and having the financing in place to capitalize on additional acquisition and revenue generating strategies, the potential for share price appreciation is far more likely than at Waste Management and Waste Connections.
Meridian is already strong. To be fair, it is the valuation metrics that need to be brought closer toward industry averages, and the likelihood the company will eventually be a beneficiary of such noble praise is likely. It is just a matter of time before the market catches up and corrects its pricing error. While a strong case can be made for investment into any of the three waste stocks covered, when looking at which stock offers the most compelling near-term case for share price appreciation, Meridian rises above the others. If not because it too is posting impressive results, then because it is rightfully worthy of higher multiples.
Disclaimer: I do not own shares in any company mentioned herein. Nor do I have plans to open any positions within the next 72 hours.
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