Waste Connections: Not Such a Dirty Job

Across the nation in nearly every sector of the market, firms are de-leveraging their balance sheet to provide investors with less risk.  Waste Connections, Inc. (WCN) is no exception as the company priced an 11 million share offering last week to raise additional capital.  According to the prospectus, the firm expects to use the funds to pay down some of its debt.  While this effectively dilutes current shareholder ownership of the company (now more shares own a smaller percentage of the entire firm), the upside is that the firm should be much more financially sound with less financial risk and lower interest expense.

The deal was quite a success even in this turbulent market with shares pricing at $32.50 and then finishing the week at $35.15.  This is especially impressive given that the company actually only received $31.20 for each share it sold with the remaining $1.30 per share going to the firms that underwrote the deal.  The lead underwriters were JPMorgan Chase & Co. (JPM), Merrill Lynch & Co., Inc. (MER), Bank of America Corporation (BAC), and Credit Suisse Group AG (ADR) (CS); and there was also a host of additional co-managers.  These managers received $1.30 for each share they were able to sell to the public, so it is easy to see why the securities underwriting business is so lucrative.

Waste Connections has a strong history of consistent earnings growth and operates primarily in the western and southern United States.  The company has elected to serve primarily second tier locations instead of primary cities such as New York, Los Angeles or Atlanta.  This focus often gives the firm exclusive access to its clients and provides higher barriers to entry for competition.  Also the company can strategically place itself in cities with strong expected economic or population growth.  While Waste Connections gets a significant amount of its growth organically, management is also experienced and talented at identifying and closing on acquisition targets.

The fact that the stock was able to trade higher after such an offering indicates strong demand from investors.  The firm operates in a stable sector of the market (people will need waste services even if they can’t afford other amenities).  This provides a bit of re-assurance for investors who are currently looking to manage risk as much as possible.  Currently the stock is trading at about 20 times next year’s expected earnings which is a reasonable multiple considering the long-term growth history.  The stock appears to be an attractive investment both from a trading standpoint as well as from a long-term investing perspective.

The number of secondary offerings has picked up tremendously in just the last week.  We are also seeing some new IPOs listed that have the potential to be strong performers in the next couple of months.  Underwriters are desperate to get these deals out the door and collect their lucrative fees, and investors are a bit wary which means underwriters must price the deals at attractive rates.  It is important to stay on top of the ever-changing news cycle as such items have a meaningful affect on sentiment which moves markets.  Stay nimble with proper risk controls, but also don’t forget to look for the outstanding opportunities that are always present in turbulent markets such as these.

WCN Notes

Disclosure: Author does not have a position in WCN.