Shares of solid waste services company Waste Connections (WCN: Charts, News) rallied sharply on Monday, after the company announced plans to acquire privately held R360 Environmental Solutions for $1.3 billion to increase its oilfield waste management services. Over the past year, a weak domestic economy has put substantial pressure on municipal solid waste companies. As a result, waste companies have been forced to diversify into non-traditional areas in order to increase revenue. CEO Ronald Mittelstaedt noted that these new areas of growth would be important in increasing the company’s organic growth over the next year. “While a tepid economy has impacted MSW volumes,” Mittelstaedt stated, “increased drilling activity in unconventional areas is fueling impressive organic growth within the exploration and production waste sector.”
Waste Connections traditionally generates the majority of its revenue through the transportation of solid waste containers via rail connected facilities. The company also provides residential, commercial and industrial waste disposal and recycling services in 29 states, and helps treat and dispose of non-hazardous waste generated in the exploration and production of oil and natural gas in Louisiana.
By acquiring Houston, Texas-based R360, Waste Connections increases its oil and natural gas waste management exposure to new areas such as the Permian, Bakken and Eagle Ford Basins. Waste Connections will also gain R360′s 26 waste management facilities. R360 currently generates approximately $300 million in annual revenue. The merger is forecast to add over 400 basis points to Waste Connections’ consolidated EBITDA margin. R360 CEO Troy Thacker stated that the merger “is a terrific opportunity that should enable us to grow more rapidly.” The deal is expected to close by the fourth quarter of fiscal 2012.
The last time Waste Connections reported earnings, in late July, the company reported earnings of 36 cents per share, or $44.4 million, on revenue of $410.7 million for its second quarter. This was a decrease in income from 39 cents per share, or $44.8 million, in the prior year quarter, but a 5.3% increase in revenue. The company’s operating income was impacted by $10.5 million in expenses related to relocating its corporate headquarters from California to Texas, acquisition-related transaction costs and stock-based compensation. Most of the company’s staff had been relocated to Texas by July and August. Waste Management increased its cash from $8.2 million to $136 million between March and June, 2012. Long term debt also faded from $977 million to $883 million over the same period.
An increasing cash flow, fading debt and the strength to seal large acquisitions such as R360 are all positive catalysts suggesting that the company may begin a new growth cycle soon. However, the company’s future is also strictly dictated by environmental regulations regarding its disposal methods, as well as increased scrutiny of the oil and natural gas industry.
Shares of Waste Connection trade at 20.2 times forward earnings with a 5-year PEG ratio of 2.8, suggesting that the stock is neither cheap nor prone to growth. However, the stock pays a quarterly dividend of 9 cents per share – a 1.12% yield at current prices. Although shares rallied nearly 10% on Monday, the stock is still down nearly 4% over the past twelve years, and is trading squarely near the middle of its 52-week range between $28.70 and $35.95.
Other News About WCN
Waste Connections Expand Soil Field Services With $1.3 Billion Buy
Waste Connections attempts to find alternative sources of revenue as government spending shrinks.
Waste Connections Reports Second Quarter Financials
A look back at the company’s second quarter earnings.
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