industrials waste connections, inc. (nyse: wcn) · 2019-04-19 · we forecast conservative growth...
TRANSCRIPT
Nate Disterhoft
Tyler Dennis
Brett Burns
Ethan Ellinger
Waste Connections is an industry-leader in solid waste removal. Their focus on rural
and secondary markets is a competitive advantage that gives WCN the ability to
negotiate prices with customers without risking price wars against larger
competitors. However, we believe that their past stock performance is unsustainable
due to their focus on inorganic growth and lower revenue growth projections
resulting from economic and industry trends.
Drivers of Thesis
• Unfavorable economic outlook: Key macroeconomic indicators
including real GDP (2.4% growth) and unemployment (3.8%) are projected
to create an inhospitable growth environment due to subdued market
growth and rising input costs.
• Increased market consolidation: Waste Connections’ heavy reliance on
growth by acquisitions is projected to be hurt by an increasingly merging
industry. We anticipate a bearish inorganic growth at 2.5%, 50 basis points
below management’s acquisition growth rate target.
• Overvalued trading price: WCN is trading at a 2.4% premium to intrinsic
value. Their trading multiples are higher than comparable companies.
Risks to Thesis
• Energy and Production (E&P) tailwinds: The United States’ projected
increase in oil production is estimated to grow WCN’s E&P segment by
35%.
• Favorable pricing environment: Waste Connections’ focus on secondary
and rural markets allows for a more stable pricing model. We project a
4.5% pricing increase, with this assumption baked into revenue segments.
Waste Connections, Inc. (WCN) is the
third-largest solid waste service
company in North America. Their
services include waste collection,
transfer, disposal, treatment, and
recycling. They also provide non-
hazardous exploration and production,
waste treatment, recovery, and disposal
services. The company was founded by
Ronald J. Mittelstaedt in 1997 and is
headquartered in Vaughan, Canada.
WCN S&P 500
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WCN RSG WM
FactSet
Analysts
Earnings Estimates
Investment Thesis
Target Price: $84-$89
Company Overview
12 Month Performance
Relative Financial Performance
Krause Fund Research
Spring 2019
Industrials Waste Connections, Inc. (NYSE: WCN)
Recommendation: April 15, 2019 SELL
FactSet
2
Sell Rating Issuance
Our team is issuing Waste Connections, Inc. (NYSE:
WCN) a SELL rating for the Krause Fund Portfolio. This
rating is supported by various economic, industry,
company, S.W.O.T., valuation, and sensitivity analyses
that will be explored in this report. We anticipate
declining revenue growth year over year into perpetuity
and believe the headwinds facing WCN outweigh the
tailwinds. We recommend no action for the Krause Fund
as we predict that Waste Connections will not be able to
sustain their historical growth levels. Further, our DCF
and EP valuation model calculates that the intrinsic
valuation of WCN is $86.99, indicating the company is
overvalued.
Real U.S. Gross Domestic Product (GDP)
A growing GDP indicates increased business for the
Industrials industry, as increased GDP can lead to
increased consumer and commercial spending, therefore
increasing corporate revenues. From the added revenues,
companies can invest in capital expenditures or research
and development expenses to contend within the
competitive waste services industry.
The GDP forecast considers inflation, the labor market,
and consumer spending. We anticipate the labor market
tightening with less supply for in-demand jobs; this is
shown with many pay raises, such as Bank of America
raising its minimum wage to $20 an hour37. We anticipate
consumer spending will follow closely with the labor
markets. If the population stays employed, then consumer
spending will stay strong.
The Conference Board, a future-focused think tank,
estimates a 2.4% and 2.2% real GDP growth in 2019 and
2020, respectively, after 2018 real GDP growth of 2.2%36.
After the Federal Reserve eased concerns about rising
interest rates in the short term, we predict growth
consistent with The Conference Board in 2019. Barring
any extraordinary development or crisis in the economy,
we expect subdued growth at 2.0% in the long term.
Inflation
Consumer Price Index (CPI)
The Consumer Price Index (CPI) measures the price
level of consumer goods. The CPI includes pricing that
relates to residential solid waste collection, Waste
Connections’ largest business sub-segment by revenue.
Bureau of Labor Statistics
The chart above illustrates the historical change in Non-
Energy Consumer Services prices gathered by the Bureau
of Labor Statistics. This segment of the CPI shows the
relative increase in consumer spending for services
including municipal solid waste removal. Following
stagnated price increases during the Financial Crisis, the
month-over-month growth has returned to 2.7% for
March 2019. The CPI is used in servicing contracts
between residential consumers and waste collection
companies, which drives revenue growth for Waste
Connections through organic price increases13. Our model
includes this price increase on the decomposed revenue
forecast of municipal solid waste collection, in addition to
contract sourcing and geographic expansion. We predict
4.5% pricing growth, pursuant with management
guidance.
Producer Price Index (PPI)
The Producer Price Index measures the price changes
between producers and other commercial entities. It
serves as the leading indicator for future prices at the
consumer level. The chart on the next page illustrates the
historical increase in prices for producers in the Solid
Waste Collection sector.
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Consumer Price IndexServices less energy services
Executive Summary
Economic Analysis
3
St. Louis Federal Reserve
The PPI for Solid Waste Collection drives revenue growth
for Waste Connections’ commercial and industrial solid
waste removal services. The PPI forecast is used when
pricing contracts with construction companies,
commercial entities, and municipalities. Thus, steady
growth in the PPI will increase Waste Connections’
commercial and industrial revenue segments. We predict
the PPI for the Solid Waste Industry to eclipse 145.0
during 2019, following the previously noted inflation rate.
The PPI change represents faster growth in the
commercial space than the residential space.
Labor Market
The United States has seen a tightening in the labor
market during the last several years. During the financial
crisis, the unemployment rate rose above 10%9. The
unemployment rate has steadily decreased since its peak
in 2008. As of today, just over seven million jobs are
unfilled and just over six million workers are
unemployed24. As the United States nears full
employment, wage growth is expected to occur15. The
chart below illustrates the trend towards full employment
and the recent development of a labor shortage.
Bureau of Labor Statistics
A strong job market encourages spending across the entire
economy, however, wage growth isn’t necessarily a
positive indicator for Waste Connections. Because waste
collection services are a non-discretionary expense for
consumers, we cannot forecast residential revenue growth
based on increased consumer spending power. Significant
wage growth would increase Waste Connections’ cost of
operations by millions of dollars as solid waste collection
is a very labor-intensive operation. A tight labor supply or
a shortage of qualified collection workers will greatly
impact the firm’s cost structure. We expect the tax reform
will further tighten the United States’ labor supply,
increasing Waste Connections’ cost of operations and
decreasing their gross margin.
Crude Oil
Prices
As of this report publish date, crude oil is trading at
$63.76 per barrel2. Following a crash in Q4 2018, oil
prices have rebounded from a $42.53 low. According to
analysts at RBC, oil prices are expected to increase in the
summer of 201927. The chart below illustrates historical
prices of crude oil, which have fallen since the United
States became less reliant on OPEC.
MacroTrends
Crude Oil is a price input for the Solid Waste Collection
business segment of WCN. Their thousands of waste
collection vehicles are fueled by gasoline, so an increase
in oil prices would impact Waste Connection’s cost of
operations. Oil prices fluctuate dramatically based on
geopolitical tensions and supply shortages. However, the
United States holds an advantage in the commodity
market as a net exporter of oil18. We expect prices to stay
relatively consistent with inflation based on competing
forces in the oil market.
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Producer Price IndexSolid Waste Collection
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Labor Supply vs. Unemployment United States
Job Openings Unemployment Level
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Crude Oil PricesPrice per Barrel ($USD)
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Production
For the first time since 1973, the United States became the
world’s largest producer of crude oil in 201818. The
Permian Basin, a shale oil field in the Southwestern
United States, is estimated to hold as much as 49 years of
oil at current production rates21. Because of this oil
deposit, we expect that the United States will continue to
increase its oil production rate. The chart below shows the
historical growth in production that we expect will
continue for the coming years.
U.S. Energy Information Administration
While oil prices are an input price for Waste Connections’
cost of operations, oil production in the United States is a
revenue growth opportunity for the Exploration and
Production (E&P) business segment. Waste Connections
services United States oil companies by managing the
hazardous by-products resulting from oil and natural gas
production activity. As the United States increases its
daily oil production, the market will see an increase in
demand for E&P waste management services.
Recycled Commodity Prices
Waste Connections offers residential, commercial,
industrial, and municipal recycling services. After the
recyclables are collected, they are processed and sold to
manufacturers overseas. For this segment of revenue, the
firm is exposed to the recycled commodity market. Based
on new legislature passed in China, recycling companies
are required to process plastic recycled materials at much
higher costs, decreasing margins35.
According to Jerry Powell of the Environmental
Protection Agency, United States recyclable exporters
will increase their outputs to India at lower prices28.
Unless China eases its environmental regulations,
recycled commodity prices will stay low for the near
future. During 2018, Waste Connections’ revenue from
their recycling business decreased by 42.7% year over
year1. Our model forecasts the recycling segment to
continue to decrease because of current and future
commodity prices.
Capital Markets Outlook
We expect slowing economic growth for the overall
market, a tightening labor market, and rising commodity
prices for Waste Connections. Steadily inflating prices in
the Non-Energy Services sector will drive organic
revenue growth for the firm’s residential, commercial,
and municipal collection segments. The Federal Reserve
has eliminated most economists’ short-term concerns for
rising interest rates, but a termporarily inverted yield
curve earlier this year warns of a U.S. economic downturn
in the near future22. Based on these concerns related to
Waste Connections’ input costs and the overall economy,
we forecast conservative growth for the affected revenue
segments. The Company Analysis section will detail
specific impacts on these revenue segments.
Waste Connections belongs to the Industrials sector and
the Environmental & Facilities Services sub-industry of
the Standard and Poor’s Global Industry Classification
Standard20. The Industrials sector is fundamentally
similar to the Materials sector, however, Industrial
companies more often provide professional services, as is
the case for Waste Connections. The Industrials sector is
highly correlated to broader markets, with the highest
historical correlation of any sector to the S&P 50038.
Within the broad spectrum of the Industrials sector, waste
collection services has three major players: Waste
Management (NYSE: WM), Republic Services (NYSE:
RSG), and Waste Connections (NYSE: WCN). Waste
collection services is a mature industry, where main
growth drivers include acquisitions, geographic
expansion, and competitive pricing.
Waste Connections provides a variety of services that are
standard in the industry, including solid waste collection,
recycling, disposal, transfer, and landfill. However,
Waste Connections has not expanded their services to
energy production, which Waste Management and
Republic Services both provide33, 34, 31.
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Industry Analysis
5
Industry Consolidation
M&A Activity
The Tax Act of 2018 signed under the Trump
Administration lowered the federal corporate tax rate in
the United States to levels that predate World War II10.
This decrease in income taxes paid by corporations has
given businesses significantly more capital on hand. Ron
Mittelstaedt, CEO of Waste Connections, predicted
before the tax reform was passed that the United States
would see an “M&A bonanza not just in our industry, but
in many” because of increased cash availability32. His
prediction held true. Merger and acquisition deal value
rose 79% in the United States following the tax reform29.
Waste Connections spent $1.032B on various acquisitions
in 20181. The graph below shows the global and United
States trend in M&A deal value.
Thomson Reuters Mergers and Acquisitions
As the waste collection service industry continues to
mature, further consolidation through mergers will occur
as industry leaders seek synergies, larger market shares,
and margin increases. Waste Connections went through a
massive merger deal in 2016 with Progressive Waste
Services that nearly doubled the firm’s revenue. On April
14th, 2019, Waste Management announced a $2.9 billion-
dollar acquisition deal with Advanced Disposal Services,
combining the first and fourth largest firms in the waste
collection service industry39. This will be discussed in the
next segment.
Waste Management Buys Advanced Disposal
In the company’s biggest acquisition ever, Waste
Management, Inc. announced on April 14th, 2019 that it
would buy Advanced Disposal Services, Inc. for $2.9
billion. This price tag puts a 22.1% premium on shares of
Advanced Disposal. The deal is expected to decrease
costs for Waste Management by $100 million per year and
add over $1.5 billion in revenue39.
FactSet
While Waste Connections has developed a corporate
strategy based on niche markets, consistently-expanding
Waste Management is gaining market share. More
synergies for Waste Management will provide a greater
advantage in the event of pricing wars. This development
could also indicate another round of acquisitions for
Waste Connections, which has slowed since their streak
of deals in 2018. Our model forecasts more conservative
margins than management projections based on increased
potential for price competition.
China’s Recycling Policy
China was the world’s largest importer of waste paper,
used plastic, and scrap metal for decades. Buying
recyclable materials supported their growth as the leading
manufacturing country. Recycling companies like Waste
Connections have relied on exporting recyclables to
China for years. In 2017, Chinese President Xi Jinping
and the Chinese government restricted the types of post-
consumer recyclables that the country would accept. The
typical industry standard for contamination in the
recycled commodity trade is between 1% and 5%28.
China’s new standard is below 0.5%, which means that
most recycling companies will need to change their
sanitization operations before resuming commodity
trading in China.
Overall recyclable trading between the United States and
China is down 35%28. Paper and scrap metal trading has
survived; however, the recycled plastic trade is virtually
suspended as U.S. firms attempt to clean up their plastics.
Waste Connections has a recyclables operation that is
relatively small at 1.64% of total revenue1. Our model
forecasts the recycling segment to shrink relative to other
segments in the next five years because of the hobbled
trade environment.
$14,914
$10,041
$4,923
$1,558
Waste
Management
Republic
Services
Waste
Connections
Advanced
Disposal
Services
Rev
enue
($M
)
Revenue by CompanyWaste Services Industry
6
Privatization of Residential Waste Services
In 2011, the National Solid Waste Management
Association (NSWMA) published a report titled
“Privatization: Saving Money” which argued that
privatizing the collection and processing of waste and
recyclables can produce cost savings of 20%-40%25.
Because private corporations can take advantage of
economies of scale and facilitate more than one contract
simultaneously, they can service residential collection
operations cheaper and more efficiently. This report also
includes that labor incidents are four times less likely in
the private sector and employees miss work 60% less
often17.
Krause Fund Model
Since the 1980s, the percentage of private municipal solid
waste collection for residential zones has increased from
30% to over 60%. A debate arose in early 2018 about the
working conditions for private sector waste collection
employees. The Solid Waste Association of North
America (SWANA), another standards board in the waste
industry, has voiced additional concerns. They argue that
waste collection is a public health issue and local
government should serve as the managing body19. For
these reasons, we forecast revenue for commercial
collection to outpace residential collection.
EPA and Zero Waste Agenda
Environmental protection has become a tent pole topic of
political discussion since scares of pollution and global
warming began. Several localities in the United States
have begun working towards Zero Waste, a term that
refers to the systematic removal of products, processes,
and materials that are disposed of in landfills. Further
attention surrounding Zero Waste emerged in late 2018
when Congresswoman Alexandria Ocasio-Cortez
released an environmental protection proposal called the
Green New Deal18. The Environmental Protection
Agency has worked through a case study in the City of
San Francisco with the goal of diverting 100% of waste
from landfills by the year 202023. The city has mandated
an environmental code referred to as the “Fantastic
Three,” which divides residential waste containers into
compost, recyclables, and landfilled trash.
The trend towards Zero Waste provides the waste
collection industry an opportunity to provide more
expensive services. As more cities choose to write
contracts with not only landfill disposal, but recycling and
compost, Waste Connections and other collectors will be
able to expand their services. If government regulation
mandates composting and sustainability nationally, Waste
Connections will have significant growth opportunity. As
noted previously, this effort will be expensive and labor-
intensive for both waste collection companies and local
municipalities and is forward-facing. Our model includes
the possibility for expansion into compost in our Landfill
revenue forecast, which would likely be serviced by the
same business unit.
Peer Comparisons
Waste Connections is among the largest of firms in the
solid waste collection industry, however, their corporate
strategy to target rural markets causes them to compete
with low-cap waste companies as well. The fact that
Waste Connections has a large market-cap and a different
niche led us to develop two sets of comparable
companies.
The first set of companies are the previously noted
industry-leaders: Waste Management and Republic
Services. Both firms have more than double the revenue
of Waste Connections and do so by controlling the waste
stream through vertical integration. In comparison to WM
and RSG, WCN provides fewer services and has less
influence in the urban market. The table below depicts the
size comparison between WCN and its largest industry
competitors.
Company Name
Market
Cap
($M)
Total
Assets
($M)
Total
Revenue
($M)
WM – Waste Management 44,277 22,650 14,914
RSG – Republic Services 25,438 21,617 10,039
WCN – Waste Connections 23,452 12,627 4,606
FactSet
Waste Connections trades at a much higher EV/EBITDA
multiple compared to large peer firms. Relative to RSG
and WM, WCN maintains a similar operating margin,
which means that the firm will be able to compete in
pricing competition if needed. The table on the following
page depicts relative profitability between the three firms.
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2016 2017 2018 2019E 2020E 2021E
Collection Revenue by SegmentCommercial vs. Residential
Commercial Residential
7
Company Name
Operating
Margin
(%)
𝐄𝐕
𝐄𝐁𝐈𝐓𝐃𝐀
ROE
(%)
WM – Waste Management 18.3 12.59x 31.3
RSG – Republic Services 17.5 11.71x 13.1
WCN – Waste Connections 16.9 18.77x 12.8
FactSet
The second set of companies are smaller market
capitalization companies that compare to Waste
Connections in a variety of ways.
Clean Harbors, Inc. (NYSE: CLH) is a solid waste
collection company based out of Massachusetts. Their
services are limited to the collection of commercial and
residential solid waste, but their focus on the rural market
allows us to compare their profitability to Waste
Connections. In 2018, WCN and CLH had 41.79% and
30.12% gross profit margins, respectively. In a similar
market niche, WCN is able to take advantage of scale to
operate at a higher margin.
Advanced Disposal Systems (NYSE: ADSW) is the
fourth largest provider of solid waste services in North
America. Their size is the most comparable with Waste
Connections. However, it was recently announced that
Waste Management would acquire them. Waste
Management will pay a 22.1% per-share premium, which
could set precedent for future acquisition prices.
Secure Energy Services (OTC: SECYF) is a Canadian
firm that specializes in E&P waste removal, which is
Waste Connections’ fastest growing revenue segment.
SES is a considerably smaller firm, and their lack of
benefits from economies of scale is evident. The operating
margin of SES is 1.71%2. Their E&P operation in a less-
vibrant Canadian oil market stifles the firm’s profitability.
Corporate Strategy
Waste Connections seeks to avoid highly competitive,
large urban markets. They instead target secondary and
rural markets to avoid bidding wars and maximize market
share. WCN utilizes niche markets, like Exploration and
Production (E&P) waste treatment and disposal services,
to provide additional revenues and integrated services.
Waste Connections serves customers in 41 states in the
United States and six provinces in Canada1. To the right
is a map of WCN locations throughout North America.
2018 Annual Report and Form 10-K
By targeting secondary and rural markets, Waste
Connections eludes market share competition from larger
players in the industry. This strategy gives WCN a higher
local market share than would be attainable in more
competitive urban markets. Ultimately, this reduces their
exposure to customer churn and improves financial
returns. Further, WCN is able to enter into long-term
contracts and control the waste stream. This vertical
integration gives WCN industry-leading margins2.
FactSet
As previously mentioned, Waste Connections utilizes a
strategy to control the waste stream. This provides a
competitive advantage where waste collection services
are provided under exclusive arrangements or where
waste disposal is municipally owned or funded. WCN
focuses on providing integrated services, from collection
through the disposal of solid waste in landfills they own
or operate.
41.79%
38.75%37.98%
35.43%
Waste
Connections
Republic
Services
Waste
Management
Advanced
Disposal Svcs
Gross Margin2018
Company Analysis
8
Waste Connections’ revenue growth has largely been
driven by acquisitions. In 2016, they acquired Progressive
Waste Solutions for $5.162B in WCN’s largest
acquisition to date. They seek acquisition targets where
WCN is able to:
1. Provide waste collection services under
exclusive arrangements such as franchise
agreements, municipal contracts, and
governmental certificates
2. Gain a leading market position and
provide vertically integrated collection
and disposal services
3. Gain a leading market position in a niche
market through the provision of
treatment and disposal services
Our model, pursuant with management guidance, predicts
that WCN will continue to be aggressive in their number
of acquisitions. We forecasted that around 2.5% of
WCN’s future revenue growth will result from
acquisitions. This projection is bearish in regards to
management’s 3%-4% revenue from acquisitions target3.
This is due to increased market consolidation with limited
targets. The chart below details the past three years of
acquisitions.
Year Number of
Acquisitions
Net Fair Value
($M)
2018 20 1,032
2017 14 562
2016 13 5,179
2018 Annual Report and Form 10-K
Business Segments
Waste Connections separates their revenue into six
segments:
1. Collection
2. Landfill
3. Transfer
4. Recycling
5. E&P
6. Intermodal
To the right is a pie chart describing what percent of total
revenue each business segment makes up. Collection,
Landfill, and Transfer are clearly WCN’s largest revenue
generators.
2018 Annual Report and Form 10-K, Krause Fund Model
Collection
Waste Connections provides collection services to
residential, commercial, municipal, industrial, and E&P
customers. Their services are typically provided under the
following arrangements1:
1. Governmental certificates
2. Exclusive franchise agreements
3. Exclusive municipal contracts
4. Residential subscriptions
5. Residential contracts
6. Commercial, industrial, and E&P service
agreements
Governmental certificates, exclusive franchise
agreements, and exclusive municipal contracts grant
WCN the rights to provide municipal solid waste (MSW)
services within specified areas at established rates and are
typically seven years or more in length1. Where these
agreements are not available, they enter into residential
subscriptions and contracts. In these markets, WCN may
also provide commercial and industrial services under
customer service agreements generally ranging from one
to five years in duration1. Finally, in certain E&P markets,
they offer containers and collection services to provide a
closed loop system for the collection of drilling waste and
subsequent transportation of the waste to their facilities.
With Collection being WCN’s largest revenue generator,
management is focused on expanding this segment the
most. Our model projects a 7.46% growth in Collection,
largely driven by a 7.43% growth in the Commercial
Waste Collection service. This sub-segment is expected
to grow due to the PPI increasing4.
9
Landfill
Waste Connections owns or operates 68 MSW landfills,
11 E&P landfills, and 14 non-MSW landfills. WCN owns
landfills to achieve vertical integration. An additional
benefit to owning and operating their own landfills is that
Waste Connections can control the waste stream. They are
actively seeking to expand the permitted capacity at 14 of
their landfills1.
We project that the waste industry will continue to
consolidate and will result in less available space to
provide services. The lack of space will also lead to
increased environmental guidelines. Therefore, we
predict that Landfill revenue will fall by 0.4%.
Transfer
Transfer stations receive, compact, and/or load waste to
be transported to landfills or treatment facilities via truck,
rail, or barge.
With Waste Management announcing their proposed
acquisition of Advanced Disposal Services, we believe
that WM will be a giant in the Transfer portion of the solid
waste management industry. WM currently owns 314
transfer stations, while ADSW currently owns 73.
Combined, their 387 stations dwarf WCN’s 1321, 5, 6. As a
result, revenue generated from Transfer is expected to
decrease by 1% annually.
Recycling
Waste Connections offers residential, commercial,
industrial, and municipal customers recycling services for
a variety of recyclable materials. The majority of the
recyclables WCN processes are sold to US and Asian
customers.
China’s new regulation that requires recycled products to
be 99.5% free of contamination is a significant
headwind7. As Recycling is not a major portion of WCN’s
revenue, this hindrance will not significantly affect their
operations. However, we forecast that Recycling will
decrease by 25% in 2019.
E&P
E&P waste refers to the byproducts resulting from oil and
natural gas exploration and production activity. E&P
revenue is generated by vertical and horizontal drilling,
hydraulic fracturing, production, and clean-up activity. It
is complemented by other services including closed-loop
collection systems and the sale of recovered products.
E&P activity is heavily driven by the regulatory
environment, pricing, and disposal alternatives1.
As mentioned previously, the United States increasing its
oil production is a key tailwind for the E&P segment of
WCN. Our model projects a 35% increase in E&P
revenue in 2019 with continued double-digit growth for
the following three years.
Intermodal
Waste Connections provides intermodal services
throughout the Pacific Northwest. Intermodal logistics is
the movement of containers using two or more modes of
transportation, usually including a rail or truck segment.
WCN has a contract with Union Pacific railroad in order
to perform intermodal services1.
Because Intermodal is a small segment of Waste
Connections and is limited to the Pacific Northwest, we
forecasted modest constant growth at 4% annually.
Recent Developments
2018 Q4 Earnings Call
Management discussed positive solid waste pricing in
2018. They expect a 4.5% pricing growth in 2019. This
stems from inflation and forward-looking PPI growth.
Recycling was down almost 30%. Management also
commented positively on E&P activity. In Q4, E&P
revenue was up 20% year over year. Each of these
considerations was taken into account in our projections.
Management was also confident in outsized acquisition
activity in 2019. As previously mentioned, we captured
this assumption in our model by projecting 2.5% of
revenue growth will be due to acquisition activity3.
Management Updates
Waste Connections recently announced that CEO Ron
Mittelstaedt is taking a temporary leave of absence to
address health matters affecting him and his family.
President Worthing F. Jackman will assume duties as
principal executive officer in the meantime. Going
forward, it will be important to monitor how WCN
operates should their founder and CEO fully step down.
Additionally, a board member of Waste Connections,
Robert H. Davis, passed away on April 6, 2019. Mr. Davis
had served on WCN’s board since 20018.
10
Strengths
Waste Connections has a well-diversified portfolio of
service offerings. As they focus on vertical integration,
WCN reduces the cost of operations and realizes
synergies from acquisitions well. Waste Connections’
focus on secondary and rural markets allows for a more
stable pricing model with longer-term contracts. This
focus also allows WCN to control the entire waste stream.
These strengths are reflected in our model with 2.5% of
our revenue growth in 2019 being due to acquisitions. As
synergies are fully realized from the Progressive
acquisition in 2016 and more acquisitions are made in the
future, WCN will enjoy expanded margins.
Weaknesses
Waste Connections relies on labor-intensive operations in
order to provide their services. With unemployment at
3.8%9, higher wages may plague margins. Additionally,
operational risks are high in the solid waste collection
industry. Truck accidents, equipment defects, fires,
explosions, and foreign currency exchange rate
fluctuations present hazards to WCN.
Further, Waste Connections only CEO, Ron Mittelstaedt,
has taken a temporary leave of absence for health reasons.
Should he fully step down, WCN would need to deal with
a new CEO for the first time in its history.
Opportunities
E&P is a strong opportunity for Waste Connections. This
segment helps to hedge against oil costs as they can also
profit from oil production. As the United States is less
reliant on OPEC and domestic oil production is expected
to grow, E&P is projected to become a larger segment of
WCN’s revenue. In particular, the Permian Basin is a
region where WCN is well-positioned to capitalize on the
increased oil production with demand for E&P waste
services.
We project that this opportunity will lead to a 35% growth
in E&P revenue in 2019 with sustained double-digit
growth into the future.
Threats
Waste Connections has low organic growth. In a
continually consolidating waste industry, growth by
acquisitions may be harder to come by in future years.
Input costs, like oil and labor, are expected to increase.
This may threaten the margins that WCN currently has. In
our model, we project margin growth of close to 3% from
management guidance3. However, this is more bearish
than management’s expectations due to the potential
increase in operational costs.
China’s standard that only 0.5% of recycled materials be
contaminated is a major headwind for the recycling
component of WCN. We reflect this threat with a 25%
decrease in recycling revenue.
Waste Management’s proposed acquisition of Advanced
Disposal Services presents a headwind for Waste
Connections. The combined structure of WM’s focus on
urban markets and ADSW’s focus on secondary markets
is a formidable challenge for WCN. As synergies are yet
to be experienced by WM, we only baked slight
adjustments into our model. For example, Transfer is
expected to decrease by 1% and Landfill by 0.4%
annually.
Revenue Decomposition
Our model forecasts overall revenue growth based on
individual business segment drivers. The Company
Analysis section of this report gives a detailed account of
macroeconomic, industry, and company trends and the
resulting assumption in each business segment.
Forecasted overall revenue growth is shown in the graph
below.
Krause Fund Model
Key Assumptions
Cost of Operations
We forecast cost of operations as a percentage of sales,
based on a 10-year average. We project that the synergies
that WCN will realize from acquisitions will outweigh the
8.35%
7.22%6.44%
5.63%4.79%
2019 2020 2021 2022 CV 2023
Revenue Growth
S.W.O.T. Analysis
Valuation Analysis
11
rising cost of labor, ultimately leading to a 30 basis point
decrease year over year. We recognize that this number
can be highly variable and influences a large portion of
our model. We analyze the effect of this assumption in our
Sensitivity Analysis.
SG&A Expense
We project SG&A as a percentage of sales, based on a 10-
year average. Our projection is 50 basis points lower than
the average resulting from synergies, leading to a constant
11%.
Capital Expenditures
Our model predicts that Waste Connections will increase
CapEx spending to 15% of revenue in 2019, then decrease
by 20 basis points year over year to a steady state of
14.2%. This is in-line with the acquisition-based growth
management is focused on3.
Weighted Average Cost of Capital (WACC)
We calculated Waste Connections’ Weighted Average
Cost of Capital (WACC) to be 5.66%. The WACC was
used in the Discounted Cash Flow (DCF) and Economic
Profit (EP) valuation models to find WCN’s intrinsic
stock price.
Cost of Equity
Risk-free rate: 2.65%
Risk premium: 4.95%
Beta: 0.73
Cost of Equity: 6.24%
We used the Capital Asset Pricing Model (CAPM) to
calculate the cost of equity. The risk-free rate and risk
premium are consistent with Street expectations. The
risk-free rate is derived from the 30-year Treasury Bond.
We used a 5-year beta estimate to determine firm risk.
Cost of Debt
Debt rating: BBB+
Pre-tax cost of debt: 3.36%
Tax rate: 22.60%
After-tax cost of debt: 2.60%
Waste Connections’ debt rating is BBB+, which is
slightly above the minimum for investment-grade debt.
For our pre-tax cost of debt, we used a 10-year bond
offered by WCN.
Value of Equity
The company’s equity value is currently $23,479M.
Value of Debt
The current value of debt is $4,398M.
WACC Calculation
With a capital structure of 84% equity and 16% debt,
WCN has a WACC of 5.66%.
Valuation Models
After conducting Discounted Cash Flow and Economic
Profit, Dividend Discount Model (DDM), and Relative
Price/Earnings (P/E) analyses, we identified a price range
of $84-$89 for Waste Connections. This range stems from
our belief that WCN is currently overvalued and has more
potential headwinds than tailwinds that have been
previously discussed.
Discounted Cash Flow and Economic Profit Model
Our DCF and EP model found WCN’s intrinsic stock
price to be $86.99. We believe that this is the most
accurate representation of the firm’s stock price because
it factors in free cash flow and is net of non-operating
items. This model is heavily reliant on many assumptions,
a key one being the continuing value growth rate of 2%.
CV growth is discussed in the Sensitivity Analysis
section.
Dividend Discount Model (DDM)
Waste Connections is a low dividend payout company.
The DDM model found a stock price of $53.03. We do
not take this valuation into account of our price range
because of WCN’s historically low dividend policy.
Relative Price/Earnings Model
In our Relative P/E model, we identified seven
comparable companies to analyze Waste Connections
against. We discuss these companies in relation to WCN
in the Industry Analysis section. Using these peers, we
found that the group was trading at 35.88x P/E. Using this
multiple, we calculated WCN’s stock price to be $85.23.
This value sits at the low end of our range because we
believe that Waste Connections is overvalued and is
trading at a premium to its competitors.
12
Sensitivity Testing
We conducted a variety of sensitivity analysis tests to
measure the impact of our assumptions on valuation
results.
Beta/Equity Risk Premium
We tested changes in beta against changes in the equity
risk premium in order to analyze how the impact of
market volatility impacts the stock price. The results show
that a 0.05 delta in beta can impact the price of the stock
by up to $8. Depending on what historical beta we use,
the stock price could fluctuate substantially. As we
project increased volatility in the future due to expected
headwinds, a higher beta will result. This further supports
a sell rating due to the lower stock price that would result.
Krause Fund Model
Pre-Tax Cost of Debt/Equity Risk Premium
We analyzed how changes in the pre-tax cost of debt and
the equity risk premium affect our DCF and EP stock
price. The results illustrate that a 10 basis point change in
equity risk premium and a 50 basis point change in the
pre-tax cost of debt have similar impacts on the stock
price. Our model has recessionary aspects built into it. If
a market slow down occurs, the equity risk premium
would increase and the pre-tax cost of debt would go
down. This is a limitation of the model as the price would
increase.
Krause Fund Model
SG&A Expense/Sales Growth
We also measured the impact of SG&A expense and sales
growth on the DCF and EP stock price. With SG&A
expense being a direct percentage of revenues and also
being a large input cost, a 1% change results in large
changes to the value of the stock. We are bullish in our
projected synergies from acquisitions resulting in SG&A
expense being 11% of revenue. If these synergies are not
realized, the stock price will go down.
Further, we are right around Street and management
expectations for revenue growth at 8.5%. If the
aforementioned headwinds are stronger or tailwinds are
weaker, slower revenue growth would result in a lower
stock price.
Krause Fund Model
CV NOPLAT Growth/WACC
We measured CV NOPLAT growth against our
calculated WACC. CV NOPLAT growth is a key
assumption that is used in estimating the present value of
continuing value cash flows. A 25 basis point change in
CV NOPLAT growth changes the stock price by around
$2. With increased market consolidation, it may be hard
for WCN to continue to grow at a rapid pace in the far
future, limiting CV growth. This would ultimately lower
the stock price.
For WACC, a 50 basis point change makes a substantial
impact on stock value. This is due to the fact that it is
involved in finding the PV of cash flows for both the near
and far term. With WCN being a higher-leveraged
company than its peers, it may have a higher WACC
heading into the future and therefore would have a lower
stock price.
Krause Fund Model
Cost of Operations/Capital Expenditure Growth
We performed sensitivity analysis on the cost of
operations with capital expenditure growth. Cost of
operations and CapEx are key assumptions that we talked
about in the Valuation Analysis section. CapEx is a main
driver of company growth. Management has historically
increased CapEx by around 15% year over year. In an
acquisition-heavy year, CapEx would increase and the
stock price would decrease.
Sensitivity Analysis
13
Cost of operations is an input that directly impacts
margin. We project that WCN’s realized synergies will
overcome a tighter labor market and increased oil costs.
If they are able to lower their cost of operations more than
we projected, their stock price would go up.
Krause Fund Model
Beta/Effective Tax Rate
We tested beta against the effective tax rate of WCN. We
previously tested beta against market risk premium.
Measuring it against the effective tax rate shows a
different impact these variables have on stock price in
relation to WACC. The tax rate also affects numerous
other items, like net income and debt. With an impending
United States presidential election on the horizon, the
decreased corporate tax rate could rise back to historical
levels. If this occurs, the stock price would decrease.
If there is an uptick in market volatility, the beta would
rise and the stock price would lower.
Krause Fund Model
14
This report was created by students enrolled in the
Applied Equity Valuation (FIN:4250) class at the
University of Iowa. The report was originally created to
offer an internal investment recommendation for the
University of Iowa Krause Fund and its advisory board.
The report also provides potential employers and other
interested parties an example of the students’ skills,
knowledge, and abilities. Members of the Krause Fund
are not registered investment advisors, brokers, or
officially licensed financial professionals. The investment
advice contained in this report does not represent an
offer or solicitation to buy or sell any of the securities
mentioned. Unless otherwise noted, facts and figures
included in this report are from publicly available
sources. This report is not a complete compilation of
data, and its accuracy is not guaranteed. From time to
time, the University of Iowa, its faculty, staff, students,
or the Krause Fund may hold a financial interest in the
companies mentioned in this report.
Important Disclaimer
15
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Waste Connections, Inc.Revenue DecompositionAll numbers in $M except percentagesFiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E CV 2023Revenues by Service
Commercial 970 1,344 1,453 1,561 1,666 1,766 1,860 1,947 Residential 874 1,131 1,189 1,260 1,336 1,416 1,501 1,591 Industrial and construction roll off 516 707 769 844 913 975 1,026 1,065
Total Collection 2,360 3,181 3,411 3,665 3,915 4,158 4,388 4,603 Total Collection YoY Growth 71.7% 34.8% 7.2% 7.5% 6.8% 6.2% 5.5% 4.9%
Landfill 760 988 1,063 1,140 1,217 1,295 1,373 1,450 Landfill YoY Growth 30.1% 7.6% 7.2% 6.8% 6.4% 6.0% 5.6%
Transfer 396 590 670 755 842 931 1,021 1,109 Transfer YoY Growth (4.7%) 49.0% 13.6% 12.6% 11.6% 10.6% 9.6% 8.6%
Recycling 92 162 93 69 69 69 67 65 Recycling YoY Growth 99.4% 74.9% (42.7%) (25.0%) (0.1%) (1.1%) (2.1%) (3.1%)
E&P 132 203 256 346 394 442 486 525 E&P YoY Growth (38.6%) 53.8% 25.9% 35.0% 14.0% 12.0% 10.0% 8.0%
Intermodal and other 106 147 140 145 151 157 164 170 Intermodal YoY Growth 60.4% 38.0% (4.7%) 4.0% 4.0% 4.0% 4.0% 4.0%
Intercompany (470) (641) (710) (786) (871) (965) (1,069) (1,184) Intercompany YoY Growth 36.2% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8%
Total 3,376 4,630 4,923 5,334 5,719 6,087 6,430 6,738 Total YoY Growth 59.4% 37.2% 6.3% 8.3% 7.2% 6.4% 5.6% 4.8%
Waste Connections, Inc.Income StatementAll numbers in $M except share and per share amountsFiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E CV 2023Revenues 3,376 4,630 4,923 5,334 5,719 6,087 6,430 6,738 Operating expenses:
Cost of operations (1,958) (2,705) (2,866) (3,040) (3,243) (3,433) (3,607) (3,760) Selling, general & administrative expenses (474) (510) (524) (587) (629) (670) (707) (741) Depreciation (394) (530) (573) (638) (637) (647) (669) (703) Amortization of intangibles (70) (102) (108) (106) (91) (78) (67) (58) Impairments & other operating items (28) (156) (20) (20) (19) (19) (20) (20) Gain from litigation settlement - - - - - - - - Loss on prior office leases - - - - - - - -
Operating income (loss) 452 627 832 943 1,100 1,240 1,359 1,455 Interest Expense (93) (125) (132) (137) (103) (120) (113) (120) Interest Income 1 5 7 3 3 3 4 4 Other income (expense), net 0 4 1 - - - - - Foreign currency transaction gain (loss) 1 (2) (1) - - - - - Income (loss) before income tax (provision) benefit 361 509 707 809 1,000 1,123 1,250 1,339 Total income tax provision (expense) (114) 69 (160) (183) (226) (254) (282) (303) Net income (loss) 247 577 547 626 774 869 967 1,036
Less: net income attributable to noncontrolling interests (1) (1) (0) (0) (0) (0) (0) (0) Net income (loss) attributable to Waste Connections Inc. 247 577 547 626 774 869 967 1,036
Beginning Shares Outstanding 207,781,454 247,003,810 263,666,382 263,619,976 263,562,700 263,511,492 263,430,723 263,404,285 Ending Shares Outstanding 247,003,810 263,666,382 263,619,976 263,562,700 263,511,492 263,430,723 263,380,510 263,373,711 Weighted average shares outstanding - basic 230,325,012 263,682,608 263,650,155 263,589,798 263,535,602 263,487,382 263,374,065 263,386,956 Net earnings (loss) per share - basic 1.07 2.19 2.07 2.38 2.94 3.30 3.67 3.93 Dividends per common share 0.41 0.50 0.58 0.59 0.73 0.82 0.92 0.98
Waste Connections, Inc.Balance SheetAll numbers in $M except share and per share amountsFiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E CV 2023ASSETSCurrent assets:
Cash & cash equivalents 154 434 319 851 482 1,611 1,989 2,715 Accounts receivable, net 485 554 610 650 685 717 745 767 Deferred income taxes - - - - - - - - Prepaid expenses & other current assets 104 189 164 151 161 172 181 190
Total current assets 743 1,177 1,093 1,651 1,329 2,500 2,915 3,672 Restricted cash & investments 63 167 132 135 138 141 145 148 Property & equipment, gross 6,634 7,194 8,052 8,680 9,401 10,227 11,173 12,252
Less: Accumulated depreciation (1,896) (2,373) (2,883) (3,521) (4,158) (4,805) (5,474) (6,177) Property & equipment, net 4,738 4,821 5,169 5,159 5,244 5,423 5,699 6,075
Goodwill 4,390 4,682 5,032 5,032 5,032 5,032 5,032 5,032 Intangible assets, net 1,067 1,087 1,129 1,022 931 853 785 727 Other assets, net 102 81 73 74 75 76 77 79
Total assets 11,104 12,015 12,627 13,074 12,749 14,025 14,653 15,733
LIABILITIES AND EQUITYCurrent liabilities:
Accounts payable 251 331 360 355 380 405 428 448 Book overdraft 11 19 19 18 19 19 19 19 Accrued liabilities 269 278 290 308 328 346 362 375 Deferred revenues 134 145 179 191 198 217 227 237 Current portion of contingent consideration 21 16 12 9 7 5 4 10 Current portion of long-term debt & notes payable 5 14 2 2 - 3 1 2
Total current liabilities 692 803 861 883 931 994 1,041 1,092 Long-term debt, net 3,617 3,900 4,153 4,062 3,056 3,557 3,352 3,546 Long-term portion of contingent consideration 30 31 43 31 23 16 10 - Other long-term liabilities 331 316 350 355 361 366 371 377 Deferred income taxes 779 691 760 821 886 957 1,033 1,115
Total liabilities 5,449 5,741 6,167 6,152 5,256 5,889 5,808 6,130
Equity:Common equity 4,277 4,303 4,265 4,275 4,285 4,294 4,299 4,299 Accumulated other comprehensive income (loss) (43) 108 (75) (75) (75) (75) (75) (75) Retained earnings (accumulated deficit) 1,413 1,857 2,265 2,734 3,314 3,966 4,691 5,468 Less: Treasury stock (18) (37) (56) (75) (96)
Total Waste Connections' Inc. equity 5,648 6,269 6,455 6,916 7,488 8,130 8,840 9,597 Noncontrolling interest in subsidiaries 7 5 6 6 6 6 6 6
Total capital/total equity/total partners' capital 5,655 6,274 6,460 6,922 7,493 8,136 8,846 9,603 Total liabilities and equity 11,104 12,015 12,627 13,074 12,749 14,025 14,654 15,733
Waste Connections, Inc.Cash Flow StatementAll numbers in $MFiscal Years Ending Dec. 31 2016 2017 2018CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss) 247 577 547 Adjustments to reconcile net income to net cash by operating activities:
Loss on disposal of assets & impairments 27 134 10 Depreciation 394 530 573 Amortization of intangibles 70 102 108 Deferred income tax expense (recovery), net of acquisitions 42 (153) 78 Loss on redemption of 2026 Convertible Senior Notes, net of make-whole payment - - - Amortization of debt issuance costs 5 4 4 Amortization of debt discount - - - Share-based compensation 45 39 44 Interest income on restricted assets - - - Interest accretion 11 14 15 Excess tax benefit associated with equity-based compensation (5) - - Payment of contingent consideration recorded in earnings (0) (10) (0) Adjustments to contingent consideration (3) 18 0 Other (2) 2 1 Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net (5) (39) (38) Prepaid expenses & other current assets (22) (51) 40 Accounts payable 54 50 16 Deferred revenue 8 4 18 Accrued liabilities (70) (15) 1 Capping, closure & post-closure expenditures (5) (9) (3) Other long-term liabilities 4 (11) (3)
Net cash flows from operating activities 795 1,187 1,411
CASH FLOWS FROM INVESTING ACTIVITIES:Payments for acquisitions, net of cash acquired (17) (411) (830) Cash acquired in the Progressive Waste acquisition 71 - - Capital expenditures for property & equipment (345) (479) (546) Proceeds from disposal of assets 5 28 5 Change in restricted assets, net of interest income - - - Other cash flows from investing activities (6) 1 (1)
Net cash flows from investing activities (293) (861) (1,372)
CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long-term debt 3,469 974 1,023 Principal payments on notes payable & long-term debt (3,714) (770) (971) Payment of contingent consideration recorded at acquisition date (16) (17) (6) Change in book overdraft (1) 8 (1) Proceeds from option & warrant exercises - - - Excess tax benefit associated with equity-based compensation 5 - - Repurchase of common shares & related costs - - (59) Payments for cash dividends (93) (132) (153) Tax withholdings related to net share settlements of restricted share units (11) (14) (15) Distributions to noncontrolling interests - - - Debt issuance costs (14) (4) (9) Proceeds from common stock offering, net - - - Proceeds from sale of common shares held in trust 20 11 3 Other cash flows from financing activities (0) 1 (0)
Net cash flows from financing activities (355) 57 (188) Effect of foreign currency translation on cash & cash equivalents (1) 2 (1) Net increase (decrease) in cash & equivalents 147 385 (149) Cash & cash equivalents at beginning of year 21 168 553 Less: cash held for sale (0) (0) 0 Cash & cash equivalents at end of year 168 553 404
Waste Connections, Inc.Cash Flow StatementAll numbers in $MFiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E CV 2023CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss) 626 774 869 967 1,036 Adjustments to reconcile net income to net cash by operating activities:
Depreciation 638 637 647 669 703 Amortization of intangibles 106 91 78 67 58 Deferred Income Taxes Increase 61 65 71 76 82 Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net (40) (35) (32) (28) (22) Prepaid expenses & other current assets 14 (11) (10) (10) (9) Accounts payable (5) 26 24 23 20 Deferred revenue 12 6 19 10 10 Accrued liabilities 19 19 18 16 14 Changes in other long-term liabilities 5 5 5 5 6
Net cash flows from operating activities 1,435 1,577 1,690 1,797 1,899
CASH FLOWS FROM INVESTING ACTIVITIES:(Increase) decrease in long-term investments (3) (3) (3) (3) (3) Capital expenditures for property & equipment (628) (721) (826) (945) (1,080) (Increase) decrease in other assets (1) (1) (1) (1) (1) Change in Current Portion of Long Term Debt (0) (2) 3 (1) 1
Net cash flows from investing activities (632) (727) (828) (951) (1,083)
CASH FLOWS FROM FINANCING ACTIVITIES:Changes in book overdraft (0) 0 0 0 0 Changes in contingent consideration (14) (11) (8) (6) (4) Proceeds from issuance of long-term debt, net (92) (1,006) 502 (205) 194 Payment of dividends (157) (193) (217) (242) (259) Proceeds from issuance of common stock 10 10 10 5 - Repurchases of common stock (18) (19) (19) (20) (20)
Net cash flows from financing activities (271) (1,219) 267 (468) (89) Effect of foreign currency translation on cash & cash equivalents - - - - - Net increase (decrease) in cash & equivalents 531 (368) 1,129 378 726 Cash & cash equivalents at beginning of year 319 851 482 1,611 1,989 Cash & cash equivalents at end of year 851 482 1,611 1,989 2,715
Waste Connections, Inc.Common Size Income Statement % of Revenues
Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E CV 2023Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating Expenses:
Cost of operations (58.0%) (58.4%) (58.2%) (57.0%) (56.7%) (56.4%) (56.1%) (55.8%) Selling, general & administrative expenses (14.0%) (11.0%) (10.7%) (11.0%) (11.0%) (11.0%) (11.0%) (11.0%) Depreciation (11.7%) (11.4%) (11.6%) (12.0%) (11.1%) (10.6%) (10.4%) (10.4%) Amortization of intangibles (2.1%) (2.2%) (2.2%) (2.0%) (1.6%) (1.3%) (1.0%) (0.9%) Impairments & other operating items (0.8%) (3.4%) (0.4%) (0.4%) (0.3%) (0.3%) (0.3%) (0.3%) Gain from litigation settlement - - - - - - - - Loss on prior office leases - - - - - - - -
Operating income (loss) 13.4% 13.5% 16.9% 17.7% 19.2% 20.4% 21.1% 21.6% Interest Expense (2.7%) (2.7%) (2.7%) (2.6%) (1.8%) (2.0%) (1.8%) (1.8%) Interest Income 0.0% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Other income (expense), net 0.0% 0.1% 0.0% - - - - - Foreign currency transaction gain (loss) 0.0% (0.0%) (0.0%) - - - - - Income (loss) before income tax (provision) benefit 10.7% 11.0% 14.4% 15.2% 17.5% 18.4% 19.4% 19.9% Total income tax (provision) benefit (3.4%) 1.5% (3.2%) (3.4%) (4.0%) (4.2%) (4.4%) (4.5%) Net income (loss) 7.3% 12.5% 11.1% 11.7% 13.5% 14.3% 15.0% 15.4%
Less: net income attributable to noncontrolling interests (0.0%) (0.0%) (0.0%) (0.0%) (0.0%) (0.0%) (0.0%) (0.0%) Net income (loss) attributable to Waste Connections Inc. 7.3% 12.5% 11.1% 11.7% 13.5% 14.3% 15.0% 15.4%
Waste Connections, Inc.Common Size Balance Sheet % of Revenues
Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E CV 2023Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ASSETSCurrent assets:
Cash & cash equivalents 4.6% 9.4% 6.5% 15.9% 8.4% 26.5% 30.9% 40.3% Accounts receivable, net 14.4% 12.0% 12.4% 12.2% 12.0% 11.8% 11.6% 11.4% Deferred income taxes - - - - - - - - Prepaid expenses & other current assets 3.1% 4.1% 3.3% 2.8% 2.8% 2.8% 2.8% 2.8%
Total current assets 22.0% 25.4% 22.2% 31.0% 23.2% 41.1% 45.3% 54.5% Restricted cash & investments 1.9% 3.6% 2.7% 2.5% 2.4% 2.3% 2.3% 2.2% Property & equipment, gross 196.5% 155.4% 163.6% 162.7% 164.4% 168.0% 173.8% 181.8%
Less: Accumulated depreciation (56.2%) (51.2%) (58.6%) (66.0%) (72.7%) (78.9%) (85.1%) (91.7%) Property & equipment, net 140.4% 104.1% 105.0% 96.7% 91.7% 89.1% 88.6% 90.2%
Goodwill 130.0% 101.1% 102.2% 94.3% 88.0% 82.7% 78.3% 74.7% Intangible assets, net 31.6% 23.5% 22.9% 19.2% 16.3% 14.0% 12.2% 10.8% Other assets, net 3.0% 1.7% 1.5% 1.4% 1.3% 1.3% 1.2% 1.2%
Total assets 328.9% 259.5% 256.5% 245.1% 222.9% 230.4% 227.9% 233.5%
LIABILITIES AND EQUITYCurrent liabilities:
Accounts payable 7.4% 7.1% 7.3% 6.6% 6.6% 6.6% 6.6% 6.6% Book overdraft 0.3% 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3% Accrued liabilities 8.0% 6.0% 5.9% 5.8% 5.7% 5.7% 5.6% 5.6% Deferred revenues 4.0% 3.1% 3.6% 3.6% 3.5% 3.6% 3.5% 3.5% Current portion of contingent consideration 0.6% 0.3% 0.2% 0.2% 0.1% 0.1% 0.1% 0.2% Current portion of long-term debt & notes payable 0.1% 0.3% 0.0% 0.0% - 0.0% 0.0% 0.0%
Total current liabilities 20.5% 17.3% 17.5% 16.6% 16.3% 16.3% 16.2% 16.2% Long-term debt, net 107.1% 84.2% 84.4% 76.1% 53.4% 58.4% 52.1% 52.6% Long-term portion of contingent consideration 0.9% 0.7% 0.9% 0.6% 0.4% 0.3% 0.2% - Other long-term liabilities 9.8% 6.8% 7.1% 6.7% 6.3% 6.0% 5.8% 5.6% Deferred income taxes 23.1% 14.9% 15.4% 15.4% 15.5% 15.7% 16.1% 16.6%
Total liabilities 161.4% 124.0% 125.3% 115.3% 91.9% 96.7% 90.3% 91.0%
Equity:Common equity 126.7% 92.9% 86.6% 80.1% 74.9% 70.5% 66.9% 63.8% Accumulated other comprehensive income (loss) (1.3%) 2.3% (1.5%) (1.4%) (1.3%) (1.2%) (1.2%) (1.1%) Retained earnings (accumulated deficit) 41.9% 40.1% 46.0% 51.3% 58.0% 65.2% 73.0% 81.2% Less: Treasury stock - - - (0.3%) (0.6%) (0.9%) (1.2%) (1.4%)
Total Waste Connections' Inc. equity 167.3% 135.4% 131.1% 129.7% 130.9% 133.6% 137.5% 142.4% Noncontrolling interest in subsidiaries 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Total capital/total equity/total partners' capital 167.5% 135.5% 131.2% 129.8% 131.0% 133.6% 137.6% 142.5% Total liabilities and equity 328.9% 259.5% 256.5% 245.1% 222.9% 230.4% 227.9% 233.5%
Waste Connections, Inc.Common Size Balance Sheet % of Assets
Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E CV 2023Total assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ASSETSCurrent assets:
Cash & cash equivalents 1.4% 3.6% 2.5% 6.5% 3.8% 11.5% 13.6% 17.3% Accounts receivable, net 4.4% 4.6% 4.8% 5.0% 5.4% 5.1% 5.1% 4.9% Deferred income taxes - - - - - - - - Prepaid expenses & other current assets 0.9% 1.6% 1.3% 1.2% 1.3% 1.2% 1.2% 1.2%
Total current assets 6.7% 9.8% 8.7% 12.6% 10.4% 17.8% 19.9% 23.3% Restricted cash & investments 0.6% 1.4% 1.0% 1.0% 1.1% 1.0% 1.0% 0.9% Property & equipment, gross 59.7% 59.9% 63.8% 66.4% 73.7% 72.9% 76.2% 77.9%
Less: Accumulated depreciation (17.1%) (19.8%) (22.8%) (26.9%) (32.6%) (34.3%) (37.4%) (39.3%) Property & equipment, net 42.7% 40.1% 40.9% 39.5% 41.1% 38.7% 38.9% 38.6%
Goodwill 39.5% 39.0% 39.8% 38.5% 39.5% 35.9% 34.3% 32.0% Intangible assets, net 9.6% 9.1% 8.9% 7.8% 7.3% 6.1% 5.4% 4.6% Other assets, net 0.9% 0.7% 0.6% 0.6% 0.6% 0.5% 0.5% 0.5%
Total assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
LIABILITIES AND EQUITYCurrent liabilities:
Accounts payable 2.3% 2.8% 2.9% 2.7% 3.0% 2.9% 2.9% 2.8% Book overdraft 0.1% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Accrued liabilities 2.4% 2.3% 2.3% 2.4% 2.6% 2.5% 2.5% 2.4% Deferred revenues 1.2% 1.2% 1.4% 1.5% 1.5% 1.5% 1.5% 1.5% Current portion of contingent consideration 0.2% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.1% Current portion of long-term debt & notes payable 0.0% 0.1% 0.0% 0.0% - 0.0% 0.0% 0.0%
Total current liabilities 6.2% 6.7% 6.8% 6.8% 7.3% 7.1% 7.1% 6.9% Long-term debt, net 32.6% 32.5% 32.9% 31.1% 24.0% 25.4% 22.9% 22.5% Long-term portion of contingent consideration 0.3% 0.3% 0.3% 0.2% 0.2% 0.1% 0.1% - Other long-term liabilities 3.0% 2.6% 2.8% 2.7% 2.8% 2.6% 2.5% 2.4% Deferred income taxes 7.0% 5.7% 6.0% 6.3% 7.0% 6.8% 7.1% 7.1%
Total liabilities 49.1% 47.8% 48.8% 47.1% 41.2% 42.0% 39.6% 39.0%
Equity:Common equity 38.5% 35.8% 33.8% 32.7% 33.6% 30.6% 29.3% 27.3% Accumulated other comprehensive income (loss) (0.4%) 0.9% (0.6%) (0.6%) (0.6%) (0.5%) (0.5%) (0.5%) Retained earnings (accumulated deficit) 12.7% 15.5% 17.9% 20.9% 26.0% 28.3% 32.0% 34.8% Less: Treasury stock - - - (0.1%) (0.3%) (0.4%) (0.5%) (0.6%)
Total Waste Connections' Inc. equity 50.9% 52.2% 51.1% 52.9% 58.7% 58.0% 60.3% 61.0% Noncontrolling interest in subsidiaries 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total capital/total equity/total partners' capital 50.9% 52.2% 51.2% 52.9% 58.8% 58.0% 60.4% 61.0% Total liabilities and equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Waste Connections, Inc.Value Driver EstimationAll numbers in $M except for percentagesFiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E CV 2023NOPLAT CalculationOperating revenues 3,376 4,630 4,923 5,334 5,719 6,087 6,430 6,738
-Cost of operations (1,958) (2,705) (2,866) (3,040) (3,243) (3,433) (3,607) (3,760) -Selling, general & administrative expenses (474) (510) (524) (587) (629) (670) (707) (741) -Depreciation (394) (530) (573) (638) (637) (647) (669) (703) -Amorization of intangibles (70) (102) (108) (106) (91) (78) (67) (58) -Other operating items (28) (156) (20) (20) (19) (19) (20) (20) -Lease interest payments 16 27 33 38 35 32 31 28
EBITA 469 654 865 981 1,135 1,272 1,390 1,483
Income tax (provision) expense 114 (69) 160 183 226 254 282 303 +Tax shield on interest expense 21 28 30 31 23 27 26 27 -Tax on interest income (0) (1) (2) (1) (1) (1) (1) (1) -Tax on non-operating income 0 1 0 - - - - -
Total adjusted taxes 135 (40) 191 215 250 282 309 331
Change in deferred taxes:Deferred tax liabilities - deferred tax assets 376 (88) 69 61 65 71 76 82
Total change in deferred taxes 376 (88) 69 61 65 71 76 82
EBITA 469 654 865 981 1,135 1,272 1,390 1,483 -Adjusted taxes 135 (40) 191 215 250 282 309 331 +Total change in deferred taxes 376 (88) 69 61 65 71 76 82
NOPLAT 709 606 743 827 951 1,061 1,158 1,235
Invested Capital CalculationNet Operating Working CapitalOperating current assets:
Normal cash 154 434 319 279 299 319 337 353 Accounts receivable 485 554 610 650 685 717 745 767 Prepaid expenses 98 187 164 151 161 172 181 190
Non interest-bearing current liabilities:Accounts payable 251 331 360 355 380 405 428 448 Accrued expenses 269 278 290 308 328 346 362 375 Deferred revenue 134 145 179 191 198 217 227 237
NOWC: Operating CA - Non I-B CL 82 422 264 225 241 241 247 250
+Net PPENet PPE 4,738 4,821 5,169 5,159 5,244 5,423 5,699 6,075
+Net Other Operating AssetsNet intangible assets (non-goodwill) 1,067 1,087 1,129 1,022 931 853 785 727 Operating leases PV 123 143 202 242 290 348 418 502 Other operating assets 68 68 73 74 75 76 77 79
Net Other Operating Assets 1,258 1,298 1,403 1,338 1,297 1,278 1,281 1,308
-Other Operating LiabilitiesOther non-interest bearing operating liabilities 331 316 350 355 361 366 371 377
Other Operating Liablities 331 316 350 355 361 366 371 377
Net Operating Working CapitalNOWC 82 422 264 225 241 241 247 250 +Net PPE 4,738 4,821 5,169 5,159 5,244 5,423 5,699 6,075 +Other LT Operating Assets 1,258 1,298 1,403 1,338 1,297 1,278 1,281 1,308 -Other LT Operating Liabilities 331 316 350 355 361 366 371 377
Invested Capital (IC) 6,409 6,857 7,186 7,078 7,142 7,307 7,598 8,009
Return on Invested Capital (ROIC)NOPLAT 735 636 770 827 951 1,061 1,158 1,235 Beginning Invested Capital 3,467 6,409 6,857 7,186 7,078 7,142 7,307 7,598
NOPLAT/BIC = ROIC 21.2% 9.9% 11.2% 11.5% 13.4% 14.9% 15.8% 16.3%
Free Cash Flow (FCF)Gross Cash Flow 735 636 770 827 951 1,061 1,158 1,235 Gross Cash Investment 2,942 448 329 (108) 63 166 291 411
FCF (2,207) 188 441 935 887 895 867 824
Economic ProfitNOPLAT 735 636 770 827 951 1,061 1,158 1,235
-(Beginning Invested Capital*WACC) 347 641 686 407 401 405 414 430 EP 388 (5) 84 420 550 656 744 805
Waste Connections, Inc.Weighted Average Cost of Capital (WACC) Estimation
COST OF EQUITYRisk-free rate 2.65%Risk premium 4.95%Beta 0.73Cost of Equity 6.24%
COST OF DEBTDebt rating BBB+Pre-tax cost of debt 3.36%Tax rate 22.60%After-Tax Cost of Debt 2.60%
VALUE OF EQUITYShares outstanding 264 Stock price $89.05MV of Equity $23,479
VALUE OF DEBTBook overdraft 19 Current portion of long-term debt & notes payable 2 Long-term debt, net 4,153 PV of operating leases 224 Total Debt $4,398
Weight of Equity 84%Weight of Debt 16%
WACC 5.66%
Waste Connections, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key AssumptionsCV Growth 2.00%CV ROIC 16.26%WACC 5.66%Cost of Equity 6.24%
Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E CV 2023
NOPLAT 827 951 1,061 1,158 1,235 ROIC 11.51% 13.43% 14.86% 15.84% 16.26%
DCF ModelFree Cash Flow 935 887 895 867 824 Continuing Value 29,554 Periods to Discount 1 2 3 4 4 PV of Cash Flows 885 795 759 696 23,708
Value of Operating Assets 26,842 Add: Marketable securities 132 Less: Debt (4,174) Less: PV of operating leases (224) Less: PV of ESOP (34) Less: Non-controlling interests (6)
Value of Equity 22,536 Shares outstanding 264 Intrinsic Value (per share) $85.49Price Today $86.99
EP ModelEconomic Profit 420 550 656 744 805 Continuing Value 21,956 Periods to Discount 1 2 3 4 4 PV of EP 397 492 556 597 17,613
PV of EP 19,656 Add: Beginning invested capital 7,186
Value of Operating Assets 26,842 Add: Marketable securities 132 Less: Debt (4,174) Less: PV of operating leases (224) Less: PV of ESOP (34) Less: Non-controlling interests (6)
Value of Equity 22,536 Shares outstanding 264 Intrinsic Value (per share) $85.49Price Today $86.99
Waste Connections, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Key AssumptionsCV Growth 3.00%CV ROE 15.16%Cost of Equity 6.24%
Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E CV 2023
EPS $2.38 $2.94 $3.30 $3.67 $3.93
Future Cash FlowsP/E Multiple (CV Year) 16.03 EPS (CV Year) $3.93Future Stock Price $63.06Dividends Per Share 0.59 0.73 0.82 0.92 0.98 Future Cash Flows 0.59 0.73 0.82 0.92 $63.06
Periods to Discount 1 2 3 4 4 Discounted Cash Flows 0.56 0.65 0.69 0.72 49.50
Intrinsic Value 52.12$ Price Today 53.03$
Waste Connections, Inc.Relative Valuation Models
EPS EPSTicker Company Price 2019E 2020E P/E 19 P/E 20ADSW Advanced Disposal Services, Inc. $31.99CWST Casella Waste Systems, Inc. $33.45 $0.79 $0.94 42.34x 35.59xCLH Clean Harbors, Inc. $73.09 $1.71 $2.13 42.74x 34.31xRSG Republic Services, Inc. $79.08 $3.25 $3.58 24.33x 22.09xSES Secure Energy Services, Inc. $8.42 $0.13 $0.24 64.77x 35.08xSGM Sims Metal Management Ltd. $10.01 $0.58 $0.66 17.26x 15.17xWM Waste Management, Inc. $104.26 $4.37 $4.78 23.86x 21.81x
Average 35.88x 27.34x
WCN Waste Connections, Inc. $89.05 $2.38 $2.94 37.49x 30.32x
Implied Relative Value:P/E (EPS19) 85.23$ P/E (EPS20) 80.29$
Waste Connections, Inc.Key Management Ratios
Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E CV 2023
Liquidity RatiosCurrent ratio1 1.07 1.47 1.27 1.87 1.43 2.52 2.80 3.36Quick ratio2 0.92 1.23 1.08 1.70 1.25 2.34 2.63 3.19Cash ratio3 0.22 0.54 0.37 0.96 0.52 1.62 1.91 2.49Times interest earned ratio4 4.88 5.00 6.30 6.88 10.65 10.31 12.00 12.14
Activity or Asset-Management RatiosReceivables turnover5 6.96 8.35 8.08 8.21 8.35 8.49 8.63 8.79Days' receivable6 52.45 43.71 45.19 44.46 43.73 43.00 42.27 41.54Fixed assets turnover7 0.22 0.30 0.29 0.32 0.34 0.36 0.37 0.37Total assets turnover8 0.30 0.39 0.39 0.41 0.45 0.43 0.44 0.43
Financial Leverage RatiosDebt ratio9 0.49 0.48 0.49 0.47 0.41 0.42 0.40 0.39Debt to equity ratio10 0.96 0.91 0.95 0.89 0.70 0.72 0.66 0.64Equity ratio11 0.51 0.52 0.51 0.53 0.59 0.58 0.60 0.61
Profitability RatiosGross margin ratio12 42.01% 41.59% 41.79% 43.00% 43.30% 43.60% 43.90% 44.20%Profit margin13 7.30% 12.46% 11.11% 11.74% 13.53% 14.27% 15.04% 15.38%ROA14 3.04% 4.99% 4.44% 4.87% 5.99% 6.49% 6.74% 6.82%ROE15 8.00% 10.00% 12.88% 13.62% 14.68% 15.24% 15.37% 15.16%
Payout Policy RatiosDividend payout ratio16 38.21% 22.83% 28.02% 25.00% 25.00% 25.00% 25.00% 25.00%Total payout ratio17 37.54% 22.88% 38.67% 27.88% 27.40% 27.20% 27.04% 26.96%
Footnotes1 = Current Assets + Current Liabilities2 = (Cash + Accounts Receivable + Short-Term Marketable Securities) / (Current Liabilities)3 = (Cash + Short-Term Marketable Securities) / (Current Liabilities)4 = (EBIT) / (Interest Expense)5 = (Revenues) / (Accounts Receivable)6 = (365) / (Receivables Turnover)7 = (Revenues) / (Net Fixed Assets)8 = (Sales) / (Total Assets)9 = (Total Liabilities) / (Total Assets)10 = (Total Liabilities) / (Total Equity)11 = (Total Equity) / (Total Assets)12 = (Gross Profit) / (Revenues)13 = (Net Income) / (Revenues)14 = (Net Income) / (Average Total Assets)15 = (EBIT) / (Total Assets - Total Liabilities)16 = (Dividends Per Share)/ (Earnings Per Share)17 = (Dividends Paid + Dividends Repurchased)/ (Net Income)
Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014)
Operating Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases2019 37.90 2018 32.51 2017 26.82 2016 16.42 2015 17.192020 35.20 2019 27.33 2018 21.53 2017 14.10 2016 15.622021 32.26 2020 24.50 2019 17.24 2018 10.97 2017 13.952022 30.97 2021 18.52 2020 14.85 2019 9.08 2018 10.932023 27.88 2022 15.38 2021 12.28 2020 7.90 2019 9.02Thereafter 94.21 Thereafter 63.90 Thereafter 69.44 Thereafter 50.48 Thereafter 65.54Total Minimum Payments 258.43 Total Minimum Payments 182.13 Total Minimum Payments 162.15 Total Minimum Payments 108.94 Total Minimum Payments 132.25Less: Interest 34 Less: Interest 24 Less: Interest 24 Less: Interest 17 Less: Interest 23PV of Minimum Payments 224 PV of Minimum Payments 158 PV of Minimum Payments 138 PV of Minimum Payments 92 PV of Minimum Payments 110
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 3.36% Pre-Tax Cost of Debt 3.36% Pre-Tax Cost of Debt 3.36% Pre-Tax Cost of Debt 3.36% Pre-Tax Cost of Debt 3.36%Number Years Implied by Year 6 Payment 3.4 Number Years Implied by Year 6 Payment 4.2 Number Years Implied by Year 6 Payment 5.7 Number Years Implied by Year 6 Payment 6.4 Number Years Implied by Year 6 Payment 7.3
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 37.90 36.67 1 32.51 31.45 1 26.82 25.95 1 16.42 15.88 1 17.19 16.632 35.20 32.95 2 27.33 25.58 2 21.53 20.15 2 14.10 13.20 2 15.62 14.623 32.26 29.21 3 24.50 22.19 3 17.24 15.61 3 10.97 9.93 3 13.95 12.644 30.97 27.14 4 18.52 16.22 4 14.85 13.01 4 9.08 7.96 4 10.93 9.575 27.88 23.64 5 15.38 13.04 5 12.28 10.41 5 7.90 6.70 5 9.02 7.656 & beyond 27.88 74.32 6 & beyond 15.38 49.78 6 & beyond 12.28 52.81 6 & beyond 7.90 37.94 6 & beyond 9.02 48.58PV of Minimum Payments 223.93 PV of Minimum Payments 158.26 PV of Minimum Payments 137.94 PV of Minimum Payments 91.61 PV of Minimum Payments 109.69
Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010) Present Value of Operating Lease Obligations (2009)
Operating Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases2014 18.34 2013 19.12 2012 12.05 2011 10.09 2013 10.142015 16.46 2014 17.92 2013 10.38 2012 9.72 2014 9.272016 14.77 2015 15.69 2014 7.87 2013 8.42 2015 9.672017 13.21 2016 13.93 2015 6.78 2014 6.92 2016 8.502018 10.60 2017 11.47 2016 6.06 2015 5.78 2017 7.12Thereafter 75.20 Thereafter 70.43 Thereafter 28.96 Thereafter 31.19 Thereafter 34.72Total Minimum Payments 148.58 Total Minimum Payments 148.56 Total Minimum Payments 72.10 Total Minimum Payments 72.12 Total Minimum Payments 79.42Less: Interest 26 Less: Interest 24 Less: Interest 10 Less: Interest 11 Less: Interest 12PV of Minimum Payments 123 PV of Minimum Payments 125 PV of Minimum Payments 62 PV of Minimum Payments 61 PV of Minimum Payments 67
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 3.36% Pre-Tax Cost of Debt 3.36% Pre-Tax Cost of Debt 3.36% Pre-Tax Cost of Debt 3.36% Pre-Tax Cost of Debt 3.36%Number Years Implied by Year 6 Payment 7.1 Number Years Implied by Year 6 Payment 6.1 Number Years Implied by Year 6 Payment 4.8 Number Years Implied by Year 6 Payment 5.4 Number Years Implied by Year 6 Payment 4.9
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 18.34 17.75 1 19.12 18.50 1 12.05 11.66 1 10.09 9.76 1 10.14 9.812 16.46 15.40 2 17.92 16.78 2 10.38 9.71 2 9.72 9.10 2 9.27 8.683 14.77 13.38 3 15.69 14.21 3 7.87 7.13 3 8.42 7.62 3 9.67 8.764 13.21 11.57 4 13.93 12.20 4 6.78 5.94 4 6.92 6.06 4 8.50 7.455 10.60 8.98 5 11.47 9.72 5 6.06 5.14 5 5.78 4.90 5 7.12 6.036 & beyond 10.60 55.89 6 & beyond 11.47 53.14 6 & beyond 6.06 22.34 6 & beyond 5.78 23.82 6 & beyond 7.12 26.73PV of Minimum Payments 122.98 PV of Minimum Payments 124.56 PV of Minimum Payments 61.92 PV of Minimum Payments 61.27 PV of Minimum Payments 67.46
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 496,217Average Time to Maturity (years): 3.50Expected Annual Number of Options Exercised: 141,776
Current Average Strike Price: 69.22$ Cost of Equity: 6.24%Current Stock Price: $89.05
Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E CV 2023Increase in Shares Outstanding: 141,776 141,776 141,776 70,888Average Strike Price: 69.22$ 69.22$ 69.22$ 69.22$ 69.22$ Increase in Common Stock Account: 9,813,754 9,813,754 9,813,754 4,906,877 -
Change in Treasury Stock 18,000,000 18,540,000 19,096,200 19,669,086 20,259,159Expected Price of Repurchased Shares: 89.05$ 94.61$ 100.51$ 106.78$ 113.44$ Number of Shares Repurchased: 202,134 195,971 189,997 184,205 178,589
Shares Outstanding (beginning of the year) 263,650,155 263,589,798 263,535,602 263,487,382 263,374,065Plus: Shares Issued Through ESOP 141,776 141,776 141,776 70,888 0Less: Shares Repurchased in Treasury 202,134 195,971 189,997 184,205 178,589 Shares Outstanding (end of the year) 263,589,798 263,535,602 263,487,382 263,374,065 263,195,475
Valuation of Options Granted in ESOP
Ticker Symbol WCNCurrent Stock Price $89.05Risk Free Rate 2.65%Current Dividend Yield 0.80%Annualized St. Dev. of Stock Returns 12.22%
Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 496,217 69.22 3.50 67.00$ 34,348$ Total 496,217 69.22$ 3.50 26.43$ 34,348$
Waste Connections, Inc.Sensitivity Analysis
$86.99 5.10% 5.05% 5.00% 4.95% 4.90% 4.85% 4.80% $86.99 5.25% 5.15% 5.05% 4.95% 4.85% 4.75% 4.65%0.58 105.49 106.45 107.43 108.42 109.43 110.46 111.50 1.86% 87.05 88.81 90.64 92.54 94.50 96.53 98.630.63 97.57 98.49 99.42 100.36 101.32 102.30 103.29 2.36% 85.31 87.02 88.79 90.62 92.51 94.47 96.500.68 90.61 91.48 92.37 93.27 94.19 95.12 96.07 2.86% 83.64 85.30 87.00 88.77 90.60 92.49 94.450.73 84.45 85.28 86.13 86.99 87.86 88.75 89.66 3.36% 82.03 83.63 85.28 86.99 88.75 90.58 92.470.78 78.95 79.75 80.56 81.38 82.22 83.07 83.94 3.86% 80.47 82.02 83.62 85.27 86.98 88.74 90.570.83 74.02 74.78 75.56 76.35 77.15 77.97 78.80 4.36% 78.96 80.46 82.01 83.61 85.26 86.97 88.730.88 69.56 70.30 71.04 71.80 72.57 73.36 74.15 4.86% 77.50 78.96 80.46 82.01 83.61 85.26 86.96
$86.99 5.35% 6.35% 7.35% 8.35% 9.35% 10.35% 11.35% $86.99 7.16% 6.66% 6.16% 5.66% 5.16% 4.66% 4.16%8.00% 96.98 98.64 100.30 101.96 103.62 105.28 106.94 2.75% 63.17 73.45 86.76 104.48 129.93 168.48 234.349.00% 92.13 93.74 95.36 96.97 98.58 100.20 101.81 2.50% 60.71 70.11 82.09 97.73 119.57 151.32 202.21
10.00% 87.28 88.84 90.41 91.98 93.55 95.11 96.68 2.25% 58.50 67.15 78.02 91.97 110.98 137.73 178.4811.00% 82.43 83.95 85.47 86.99 88.51 90.03 91.55 2.00% 56.50 64.51 74.44 86.99 103.76 126.69 160.2412.00% 77.57 79.05 80.52 82.00 83.47 84.95 86.43 1.75% 54.69 62.13 71.27 82.65 97.59 117.54 145.7913.00% 72.72 74.15 75.58 77.01 78.44 79.87 81.30 1.50% 53.04 59.99 68.43 78.83 92.26 109.85 134.0514.00% 67.88 69.26 70.64 72.02 73.40 74.79 76.17 1.00% 50.14 56.27 63.59 72.42 83.53 97.60 116.14
$86.99 18.00% 17.00% 16.00% 15.00% 14.00% 13.00% 12.00% $86.99 35.00% 30.00% 25.00% 22.60% 20.00% 15.00% 10.00%51.00% 114.21 115.13 116.04 116.93 117.80 118.66 119.50 0.58 87.58 95.99 104.39 108.42 112.79 121.20 129.6053.00% 104.23 105.15 106.06 106.95 107.82 108.68 109.52 0.63 80.87 88.73 96.59 100.36 104.45 112.31 120.1755.00% 94.25 95.17 96.08 96.97 97.84 98.70 99.54 0.68 74.96 82.35 89.73 93.27 97.11 104.49 111.8857.00% 84.27 85.19 86.10 86.99 87.86 88.72 89.56 0.73 69.73 76.69 83.65 86.99 90.61 97.57 104.5359.00% 74.29 75.21 76.12 77.01 77.88 78.74 79.58 0.78 65.06 71.64 78.22 81.38 84.80 91.38 97.9761.00% 64.33 65.25 66.15 67.04 67.91 68.76 69.60 0.83 60.87 67.11 73.35 76.35 79.59 85.83 92.0863.00% 54.37 55.29 56.19 57.08 57.95 58.81 59.64 0.88 57.08 63.02 68.95 71.80 74.89 80.82 86.76
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