Integrated solid waste services company Waste Connections Inc (USA) WCN is well-positioned for a potential rise in M&A activity, BMO Capital Markets said in a Monday note.
The analyst designated the stock as his top pick in the solid waste sector and said it offers a compelling mix of free cash flow, a top-tier management team and the highest growth potential among the peer group.
Waste Connections is the premier franchise in the solid waste services sector, with a long track record of strong execution, solid growth prospects and industry-leading profitability, Dodge said in the note. (See Dodge's track record here.)
The analyst said he sees scope for further growth in the company's valuation premium.
The company is best-in-class, with its focus on exclusive and secondary markets both reducing competition and supporting pricing and volume stability, Dodge said. Adjusted EBITDA margins have been well above peers and free cash flow conversion is unmatched, he said.
BMO Capital Markets said the potential rise in M&A activity at the company provides upside to its estimates and price target. Over the last decade, M&A accounted for over 75 percent of the company's revenue growth, the firm noted.
"Though our forecast does not include unannounced acquisitions, WCN's strong M&A pipeline could keep acquisition activity above targeted levels for the next few years," Dodge said.
With the valuation near the upper end of the historical range, the re-rating of the stock is in line with peers, according to BMO.
A prolonged period of slow-but-steady economic growth should translate into stable volume growth, rational pricing and continued margin expansion for the waste sector, Dodge said.
The Price Action
Waste Connections shares have gained over 32 percent year-to-date.
At last check, the shares were up modestly at $69.05.
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