The Long and Short
Relative value in Waste Connections
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Waste Connections Inc. (WCNCN: Baa1/BBB+/BBB+) appears poised to price much closer to peers after a recent upgrade by Moody’s and after posting best-in-class EBITDA and free cash flow margins. The company’s strategy of focusing on underserved markets and exclusive municipality contracts has delivered strong operating performance while limiting competition. Management has remained disciplined with conservative financial policies and has maintained leverage within their target range. Furthermore, the waste management business has long been considered recession resistant and provides for a relative safe haven in a weaker economy.
Now that WCNCN’s ratings are equalized with RSG and given its stronger margin profile and better leverage metrics, WCNCN should collapse closer to, if not on top of, Republic Services, Inc. (RSG: Baa1/BBB+/BBB+). WCNCN bonds provide for a pick-up of roughly 17 bp g-spread across the curve, relative to RSG. This relationship should flatten as WCNCN is anticipated to maintain its margin prowess, while leverage should decline further on EBITDA growth.
Exhibit 1. WCNCN Curve vs. Peers (RSG and WM)
Source: Bloomberg Trace; Santander US Capital Markets
Industry Leading Margins and Cash Flow
As the third largest solid waste company in North America, WCNCN employs a differentiated strategy which is primarily focused on exclusive and secondary markets. Since the company’s inception, management has maintained a purposeful market selection strategy which has provided for stronger margins and free cash flow generation relative to peers (Exhibit 2). WCNCN’s current mix of business is roughly 40% exclusive/franchise markets and 60% competitive markets. Their exclusive markets tend to be focused on multi-year municipality contracts which provides for good revenue visibility. On the competitive market side, the company remains focused on secondary or rural markets where there is less competition. These markets tend to benefit from greater population growth and lower churn trends. Additionally, WCNCN tends to be the only vertically integrated player in many of these markets which also provides for a competitive advantage.
Exhibit 2. WCNCN Margin and Cash Flow Analysis vs. Peers
Source: Company Reports; Bloomberg; Santander US Capital Markets
Leverage Maintained Within Target Range Despite Increased M&A Activity
Given its strong margin and free cash flow profile, WCNCN has been able to keep leverage within its 2x-3x target range. Given that the waste management industry is mature and competitive, acquisitions are an essential part of the company’s growth strategy. However, the business is highly fragmented, and acquisitions tend to be of tuck-in size. Management has been successful in maintaining operational efficiency while integrating acquisitions, which has been essential in keeping leverage within management’s targeted range.
WCNCN just witnessed a recent period of outsized M&A activity, with the company completing $2.3 billion of solid waste acquisitions in 2022 alone. The acquisitions are expected to add roughly $640 million of annualized revenue. In fact, from 2016-2022, WCNCN noted that of the $17.6 billion of capital deployed, 64% was allocated to M&A activity. In a more normalized capital deployment environment, WCNCN typically allocates approximately 22% to M&A activity. Despite the increased M&A activity, WCNCN ended the year with total leverage of 2.9x. Its leverage ratio compares favorably to both RSG and Waste Management, Inc. (WM: Baa1(p)/A-/BBB+) whose total leverage stands at 3.0x and 3.1x, respectively.
Recent Moody’s Upgrade Equalizes Ratings with RSG
Moody’s upgraded WCNCN to Baa1 with a stable outlook in early June 2023. The upgrade and stable outlook reflect the strength of WCNCN’s operating performance and industry leading margins despite weakening economic conditions. The agency goes on to note that WCNCN’s continued top line and EBITDA growth is anchored in its solid pricing fundamentals and strong cost discipline. Furthermore, the non-discretionary nature of the waste management sector provides for continued profit generation despite economic downturns.
Moody’s believes that WCNCN can continue to generate at least $900mm of free cash flow annually (after dividends) which supports its acquisition strategy. M&A activity this year is expected to moderate relative to 2022. WCNCN has not completed or announced any acquisitions year-to-date.
While WCNCN’s revenue base is smaller than its peers, its strong credit metrics and EBITDA margins temper any scale concerns, according to Moody’s. Furthermore, leverage is expected to close the year closer to the 2.6x.-2.7x area, based on management’s full year EBITDA guidance of $2.5 billion, which was just reiterated on the most recent earnings call. Management noted that there is upside to current annual guidance as inflation begins to moderate and recovered commodity values improve.
Sustainability-Linked Investments Remains a Focus
WCNCN has already achieved a net carbon benefit beyond Net Zero as operational offsets now exceed emissions by 3.4x. Management noted that it has also achieved absolute reduction in emissions as well as a two-year reduction in emissions intensity of 18%. WCNCN is also focused on a growing pipeline of renewable natural gas (RNG) projects. The company’s $200 million investment in RSG facilities is expected to produce at least $200 million in annual EBITDA by 2026.
Over the next 2-4 years, WCNCN will have roughly 12 RNG projects in development at landfills. Longer term, that number will increase to the 15-20 range. Projects will include a combination of new facilities coupled with the conversion of electrical generating facilities. These new facilities are consistent with WCNCN’s long-term ESG targets which include a 15% reduction in Scope 1 and 2 emissions as well as an increase of 40% of biogas recovery.
Additionally, WCNCN has two recycling facilities under construction, which are expected to come online by 2024. The new facilities will employ enhanced optical sorters as well as robotics, which are aimed at improving output quality while producing labor savings. The new facilities also align with its longer term ESG target of increasing resources recovered by 50%. Furthermore, the use of robotics and new sorters should help bring the company closer to its target of reducing facility incident rates by 25%.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
