Waste Connections: Stock of the Week

Why not a defensive stock with demand that won’t go away in a downturn?

Andrew Willis 20 February, 2024 | 4:35AM
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Key Takeaways for Waste Connections Stock:

  • Waste Connections proved its durability in the recent pandemic downturn, and we have very high confidence in the firm's ability to generate excess returns over the next 10 years – and likely 20 years.
  • Waste Connections generates almost half of its business through exclusive, long-term contracts where competition is rare, and half through secondary markets where they sell landfill space.
  • Investors are likely overpaying for Waste Connections stock today by around 25%, but the company is a long-term hold and continues to deliver profitability, averaging a 10% annual return on its investments (ROIC).


Andrew Willis: Growing economies are great for garbage collectors. When things are going well, we tend to go through more stuff. But what happens in a recession?

We have a great case study in Waste Connections WCN. Recently, the pandemic not only dumped the company into a mini-recession but briefly discouraged consumers from throwing things out when new goods were cut off as supply chains faltered. And the company persevered.

Much of the downturn durability of Waste Connections stock comes from its mix of primary and secondary trash businesses. Making up about 40% of the company’s revenue, primary markets provide direct exposure to basic day-to-day garbage disposal demand. The business is based on very long-term exclusive, often government, contracts that are rarely rebid.

Secondary Dumping Business is a Boon for Waste Connections

One big reason there are no rebids in the primary market, is that competitors might only have dump trucks. Making up 50% of the company’s revenue, are secondary markets, where after you pay your trashman to take it away, they then pay someone else to finally dump it. This business is common in rural areas and increasingly so as environmental and property owner concerns grow.

Sector director Brian Bernard says that the largest public waste disposal businesses have been able to expand existing landfills, but it’s difficult for even the most powerful players to construct new landfills. Meanwhile, we see garbage companies themselves as low-risk ESG bets, which may surprise you given the nature of the business – but that’s the effect of all the regulations.

Besides, the industry has been investing in ESG and even phasing in electric vehicles. So the next time you see a garbage truck, it might be one of the cleaner automobiles on the road.

For Morningstar, I’m Andrew Willis.


bulls Waste Connections Bulls Say

  • Waste Connections enjoys strong pricing power—a feature of its wide economic moat. This pricing power has allowed the firm to defend profit margins in the current inflationary environment.
  • The firm’s long-running focus on serving secondary (rural and suburban) markets helps minimize exposure to price competition.
  • Waste Connections generates industry-leading operating margins, and it has a record of applying its operational know-how to improve the profitability of acquired businesses.

bears Waste Connections Bears Say

  • Many U.S. municipalities are gradually pushing for greater solid waste reduction and recycling, which could temper the level of higher-margin waste entering Waste Connections’ landfills over the long run.
  • Reduced rig count and less drilling activity among Waste Connections’ customers in the shale plays adversely affects its R360 oil and gas business (about 3% of revenue).
  • At Waste Connections' current size, acquisition activity may need to ramp up considerably to maintain historical growth levels, which could open up the temptation to overspend on a large deal.


The author or authors do not own shares in any securities mentioned in this article.

Image credits:

1- Pawel Czerwinski on Unsplash

2- william william on Unsplash

3- Associated Press

4- Associated Press

5- Associated Press

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Waste Connections Inc245.32 CAD0.55Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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