Casella Waste Systems Has Made A Fundamental Change To Its Business, Leading To Stifel Upgrade

Casella Waste Systems Inc. CWST reported solid 1Q16 results and reaffirmed its full-year guidance.

Stifel’s Michael E. Hoffman upgraded the rating for the company from Hold to Buy, while establishing a price target of $8.50. The analyst commented that Casella Waste Systems had “truly made a fundamental change in its business model” and that these changes were resulting in improved FCF generation and lower leverage.

Moving In The Right Direction

“We now believe CWST can successfully reduce leverage to 3.0 times in the next five years,” analyst Michael Hoffman wrote. He explained that the company would achieve this with improved quality of sales growth, resulting in margin expansion and lower spending, which would boost FCF growth. The excess cash would be used to “reduce leverage outright.”

Hoffman projected an increase in gross margin and EBITDA margin from 30.0 percent to 31.4 percent and from 19.4 percent to 21.1 percent, respectively. The model’s cash conversion increases from 2.8 percent sales and 14.3 percent of EBITDA to 5.6 percent and 26.6 percent over the next five years.

The analyst added that even if Casella Waste Systems is able to reduce its leverage ratio below 4 times and even 3.5 times by the time of the refinancing, its cost of debt would also decline significantly. This lends additional upside to the FCF forecast.