Waste Connections Delivers Strong Fourth-Quarter Results Driven by Tailwinds in Core Pricing

Wide-moat-rated Waste Connections WCN delivered fourth-quarter results that were mostly in line with our expectations as tailwinds in core pricing and strong acquisition activity outweighed headwinds from lower collection volumes and recycled commodity prices. For full-year 2022, Waste Connections posted over 17% top-line growth (7% organic solid waste) and adjusted EPS of $3.82 per share. Management issued a favorable outlook for 2023 propelled by continued gains in core pricing. We raised our fair value estimate by 9% to $107 (CAD 144) per share to reflect more favorable pricing dynamics in the core solid waste business.

Strong pricing power, which we view as a feature of the firm’s wide economic moat, helped offset inflationary cost pressures during the year. The company delivered record core pricing of 7.7% for full-year 2022, a 300-basis-point expansion over the prior year. Management expects core pricing to continue trending upward in 2023, reaching 9.5% for the full year. This remains well above its 10-year average of 3.9%. Waste Connections also delivered a robust adjusted EBITDA margin of 30.8% in 2022. Management anticipates 30 basis points of margin expansion in 2023, as elevated core pricing gains more than offset a 100-basis-point headwind related to lower recycled commodity prices.

Declines in recycled commodity prices weighed on recycling revenue in the fourth quarter, as old corrugated container prices fell 60% sequentially to $56/metric ton. Management expects prices to stabilize in 2023, though we note that recycling remains a small piece of Waste Connections’ business at less than 3% of annual sales. Management completed 24 acquisitions in 2022 related to its core solid waste business, acquiring nearly $640 million in annualized revenue. An average year typically results in 15-18 acquisitions and $150 million in added annualized revenue. Despite an outsize 2022, management remained committed to pursuing inorganic growth in 2023.