Goldman Initiates Environmental Service Sector At Neutral, Favors Waste Connections

U.S. Environmental Services is a “defensive group that is primarily linked to business and household formation,” Goldman Sachs’ Brian Maguire said in a report. He initiated coverage on the sector with a Neutral rating, citing “elevated relative valuation.” The 12-month price targets in the sector imply an average upside of 6 percent.

On first glance, waste collection and disposal seem “relatively commodity-like,” with little differentiation; however, not all waste stocks are similar, analyst Maguire mentioned.

Waste Connections

Maguire initiated coverage on Waste Connections Inc (USA) WCN with a Buy rating and a 12-month price target of $90, reflecting 20 percent upside. The company has a differentiated strategy of operating mainly in secondary and exclusive [franchise-based] markets, which enables it to maintain high margins.

With this strategy, Waste Connections has been able to achieve a 2.7 percent average annual yield since 2011, twice that of its closest competitors, while still generating the fastest organic volume growth with a five-year average of 1.0 percent. The company also records the highest margins, returns and cash conversion, the analyst noted.

“The industry has effectively pivoted to a “pricing first” model that allows for continued earnings growth, especially for companies with the lowest customer churn, such as WCN,” the Goldman Sachs report added.

On October 27, Waste Connections had reported its Q3 adj. EPS and revenues ahead of expectations.

Waste Management

Maguire initiated coverage on Waste Management, Inc. WM with a Sell rating and a 12-month price target of $63, reflecting a 2 percent downside.

“While WM’s strategy of emphasizing price over volume is reasonable, we believe that WM’s existing footprint in more competitive urban markets makes it more susceptible to customer churn in response to its pricing efforts,” the analyst wrote. He expects Waste Management to continue to lag peers in both organic sales and EBITDA growth.

Republic Services

The analyst also initiated coverage on Republic Services, Inc. RSG with a Neutral rating and a 12-month price target of $52, reflecting 0 percent upside. The company has put self-help initiatives in place, which may potentially generate significant SG&A savings. Moreover, Republic Services has volume leverage to a rebound in single-family housing starts.

Maguire added, however, that the stock’s valuation seems elevated currently and “could be susceptible to a shift in fund flows to more cyclical sectors unless economic data continues to disappoint.” He further noted that Republic Services has a “formula-based pricing linked to CPI” and this could continue exerting pressure on margins in the residential collection channel “until a larger percentage of contracts turn over.”

Recently, Barclays started coverage of Advanced Disposal Services Inc ADSW, favoring the stock to that of Waste Connections, Waste Management and Republic Services.