GFL Environmental Is Due For A V-Shaped Rebound

Mar. 08, 2022 2:17 AM ETGFL Environmental Inc. (GFL), GFL:CA11 Comments5 Likes

Summary

  • GFL stock peaked in 11/2021 at over $42 and closed at $26.29.
  • Growth by acquisition questioned as interest rates rise.
  • Fair value in the mid-$30s range discussed.
  • This idea was discussed in more depth with members of my private investing community, DIY Value Investing. Learn More »
Environment Concept - Globe Glass In Green Forest With Sunlight

RomoloTavani/iStock via Getty Images

After peaking in November 2021 at over $40, GFL Environmental (NYSE:GFL) fell into a downtrend pattern. This bearish selling is hardly unusual. Speculative technology stocks, which have unfavorable valuations like GFL stock fared even worse. Nasdaq is down 20.52% from its 52-week high, underperforming that of GFL stock which is down 39.85% from its high.

Should investors catch the proverbial knife and buy GFL at these levels? The company posted fourth-quarter revenue growth and estimated net leverage at around 4.3 times. Amid the Federal Reserve raising interest rates, even by a nominal 25 basis points, companies with high debt are riskier.

GFL Stock Falls After Fourth Quarter 2021 Results

In Q4, GFL posted revenue of CAD 1.54 billion. The adjusted net income was $25.9 million. GFL said it used adjusted figures “ to give effect to (a) the elimination of expenses related to the prior owners and certain other costs and expenses that are not indicative of the underlying business performance.”

High-flying technology stocks adjust results liberally. GFL reported adjusted cash flow that excluded such items as asset divestitures and the purchase of property and equipment and intangible assets. Without the $278.9 million depreciation, $126.7 million amortization of intangible assets, a divestiture loss of $86.4 million, and stock-based compensation of $14.5 million, GFL lost $77.4 million in Q4. In 2021, GFL reported a divestiture loss of $152.4 million. This reflected the timing difference between the realization of proceeds from asset divestitures followed by the redeployment into the business.

Opportunity

GFL justified its rich price-to-earnings valuation with acquisitions that lifted growth. On the conference call, Chief Financial Officer Luke Pelosi said it seeks mergers and acquisitions that expand margins. Previously, the company added 5% in top-line growth. Thanks to low net interest costs, GFL may leverage its operating profile. In addition, it benefits from organic re-deployments that will lead to another five to seven basis points of growth.

Future M&A activities should add 30% to 50% in free cash flow growth in the next year and beyond. GFL forecast revenue in the range of CAD 6.265 billion and CAD 6.365 billion. Adjusted EBITDA will be in the range of CAD 1.690 billion and CAD 1.730 billion. Adjusted FCF will be between CAD 665 million and CAD 695 million.

In the last three fiscal years, GFL demonstrated expanding adjusted EBITDA margins. It benefited from controlling costs, leveraging operations, strong productivity, and favorable pricing. Its realization of synergies may slow, reducing its margin expansion rate.

Bar chart displaying GFL

GFL Q4/2021 Presentation

Source: GFL Q4/2021 presentation

In the chart below, acquisitions peaked in the fiscal year 2020. It should benefit from synergies related to two large acquisitions. Although acquisitions slowed last year, GFL has a strong M&A pipeline this year.

bar chart: acquisitions peaked in the fiscal year 2020

GFL

Source: GFL Q4/2021 presentation

From late 2009 through 2018, the company pivoted its business from infrastructure to infrastructure services. Management sees plenty of opportunities to consolidate waste management businesses. Once it finds suitable targets at the right price, it will realize the value and grow profits.

Risk

Investors are shunning companies with massive debts. AT&T (T), for example, will spin off HBO and merge assets with Discovery (DISCA). It will use some of the proceeds to pay its large debt. Viatris (VTRS) sold its prized biosimilar assets for up to $3.335 billion. It will use the proceeds to buy back $1 billion in stock and pay down debt.

Investors dumped AT&T and Viatris stock despite their attempts to lower debt.

GFL net leverage and liquidity levels

GFL

Source: GFL Q4/2021 presentation

As shown in slide 8, GFL’s net leverage is rising. It ended the year at 4.75 times. GFL Environmental risks missing its 4.3x target. Investors are in no mood to hold highly levered companies at this time. Interest rates may rise by more than 25 bps – 50 bps in the month ahead. This year and next, interest rates could rise even further. That is a potential headwind for GFL.

GFL does not have significant maturities until 2025. In the drug manufacturing space, companies like Bausch Health (BHC) and Teva (TEVA) have a similar debt profile. They do not have significant maturities coming up. Yet markets panic sold shares of both drug firms.

Fair Value

GFL has a poor value score and a fair profit score. However, it scores an “A” grade for growth.

GFL stock grade from SA Premium

GFL stock grade from SA Premium (SA Premium)

Data from Seeking Alpha Premium

The stock has a strong growth quant score because of the revenue and EBITDA growth:

GFL displays strong growth quant score

SA Premium

Furthermore, GFL’s long-term growth of 49.60 earns it an A+ as shown below.

 GFL’s long-term growth of 49.60 earns it an A+

SA Premium

FCF per share growth will continue.

The scores suggest that markets are too cautious about GFL’s valuation. In this 5-year discounted cash flow revenue exit model, GFL should trade at a terminal revenue multiple of 2 times.

Metrics

Range

Conclusion

Discount Rate

10.5% - 9.5%

10.00%

Terminal Revenue Multiple

1.9x - 2.1x

2.0x

Fair Value

$31.96 - $38.95

$35.39

Upside

13.7% - 38.5%

25.90%

Model created using finbox

Moreover, assuming GFL’s revenue grows by around 20% annually, GFL stock is worth around $35 a share.

(CAD in millions)

Input Projections

Fiscal Years Ending

21-Dec

22-Dec

23-Dec

24-Dec

25-Dec

26-Dec

Revenue

5,526

7,349

9,774

11,924

14,309

16,456

% Growth

31.70%

33.00%

33.00%

22.00%

20.00%

15.00%

EBITDA

1,362

1,543

2,053

2,504

3,005

329

% of Revenue

24.70%

21.00%

21.00%

21.00%

21.00%

2.00%

Your Takeaway

Investors panic-sold GFL on March 7.

chart showing GFL stock in a major downtrend

Stock in a major downtrend (finviz)

The sentiment is approaching its worst. Invariably, this negativity will reverse. When it does, GFL stock has a good chance of breaking out of its downtrend.

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This article was written by

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in GFL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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