Waste Connections Inc (USA) WCN managed to win Bank of America Merrill Lynch's approval as being the best-in-class operator, with a high degree of visibility.
BofA analyst Michael Feniger initiated coverage of Waste Connections with a Buy rating and $80 price target.
Waste Connections is the third-largest solid waste company in North America, with sector-leading profitability and free cash flow conversion, Feniger said in a note.
With BofA's Waste indicator remaining firmly positive, thanks to strong housing activity, the firm said it remains bullish on the cycle. Additionally, high-margin exploration and production waste treatment is recovering from the trough.
Feniger also said the industry is seeing a better pricing environment. Waste Connections is likely to deliver 4 percent organic solid waste growth in 2018, helped by price, which could lead to 60 basis-point margin expansion.
Meanwhile, Feniger sees further consolidation in the industry in 2018, as private haulers, accounting for 35 percent of the industry, look to exit the market following the tax reform. The firm expects Waste Connections to use a large chunk of its $600 million cash balance for M&A in the coming months, driving 5-10 percent upside to its EBITDA estimates.
"We forecast 10-15% dividend growth thru 2020e as dividends typically consume 20% of FCF," the firm said.
On the valuation, Feniger said the stock's valuation is elevated, but it warrants a premium to peers, based on its proven track record of creating shareholder value, ability to expand margins, and multi-year runway for growth.
Shares of Waste Connections are up over 35 percent in the year-to-date period.
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