During the second-quarter reporting season, investors were hard pressed to find stocks that delivered positive earnings surprises and an upward price reaction to their financial results. Discussed below is Progressive Waste Solutions Ltd., of which the stock did just that, and the outlook looks bright.
This is a leading waste-management company providing non-hazardous waste and recycling collection and disposal services to commercial, industrial, municipal and residential customers in six Canadian provinces and 13 U.S. states. In the second quarter, Canadian revenue represented 36 per cent of total revenue, with the balance from the United States.
The shares are dual-listed, trading on both the Toronto Stock Exchange and on the New York Stock Exchange under the ticker BIN.
On July 30, management reported slightly better-than-expected second-quarter results with earnings of 29 cents (U.S.) per share, beating expectations of 28 cents. Management also announced a dividend increase and renewal of its share-buyback program. The stock price jumped 6 per cent the day it reported its financial results. Flooding in Texas reduced the company's margins during the quarter. Consequently, management trimmed its 2015 guidance as a result of unanticipated and one-time costs incurred in the first half of the year. For 2015, earnings per share is expected to be between $1.20 (U.S.) to $1.34, down from $1.26 to $1.39. However, operationally, the company remains on track to meet its longer-term objectives.
Listed below are reasons why this stock shouldn't be overlooked:
- Industry leadership. The company is one of the largest waste-service providers in North America. In 2010, Progressive Waste Solutions became North America’s third-largest non-hazardous solid-waste services company.
- Potential contract wins. Management is currently in discussions for a sizeable 20-year contract with the New York City Department of Sanitation for the transportation and disposal of municipal solid waste.
- Margin improvements. Adjusted EBITDA margins were 24.4 per cent in the second quarter. Management is targeting margins to expand to between 29 per cent to 30 per cent by 2019. Management sees potential margin expansion from its cost-reduction initiatives such as greater fleet automation, fuel-cost savings from converting its fleet to compressed natural-gas-powered trucks and routing efficiencies. Last quarter, management added 44 automated residential trucks, half of which were natural gas trucks.
- Growth. Management is targeting average annual organic growth of 4 per cent. Last quarter, management reported total organic revenue growth of 2.8 per cent, with volume growth of 3 per cent. Acquisition growth is a priority and management continues to seek out accretive acquisitions at attractive valuations.
In July, management announced a 6-per-cent increase to the quarterly dividend, rising to 17 Canadian cents a share from 16 cents, and equating to a yield of 1.9 per cent.
The stock is trading at an enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple of 8.2 times the 2016 consensus estimate. This is above the three- and five-year averages of 7.7 and 7.4 times, respectively.
The stock is trading relatively in line with its peers. Waste Management, Republic Services and Waste Connections are trading at EV/EBITDA multiples of 8.6, 8 and 10.4 times the 2016 consensus estimates, respectively.
The stock has been a consistent outperformer, beating the returns of the S&P/TSX composite index for the past three calendar years. In 2014, shares of Progressive Waste Solutions delivered a price return of 33 per cent, while the S&P/TSX composite index reported a price return of 7 per cent.
Year-to-date, the Canadian-listed stock price is up modestly, approximately 2 per cent. There is downside support at $35, near its 200-day moving average and just above $34, close to its 50-day moving average. There is upside resistance at $36.50, then at $37.50, and $38.
Management repurchased 2.7 million shares in the second-quarter, providing downside support to the stock price.
The relative strength index is neutral at 55, suggesting that the shares are neither overbought nor oversold. In addition, the Moving Average Convergence/Divergence histogram is near the zero line, a neutral position.
This is a well-covered mid-cap stock with 14 analysts with buy recommendations, two analysts with hold recommendations and one with a sell recommendation. One-year price targets range from $28 (U.S.) to $35 , with the average one-year price target of $31.66, equating to a potential return of 17 per cent. The consensus earnings estimate is $1.24 for 2015 and $1.44 for 2016.
The bottom line
I recommend accumulating shares near or below the $35 (Canadian)-level.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to email@example.com