Throughout much of this past year, GFL Environmental (GFL) traded in a tight range. The stock gravitated in the $20 range at that time. In mid-August, a month after our marketplace added GFL as a top idea, unusual trading volume surged.
A bearish report that sent the stock down by 8% created an excellent entry point for investors who did the homework. Spruce Point’s record for bearish calls were only about 50/50. This is no better than a coin flip. GFL called the short-selling attack baseless. It did not need to do that. In the third-quarter report, the company posted revenue growing 15.8% to $1.04 billion.
Now that GFL is approaching $30.00, why should investors keep holding this waste management firm?
Strong Q3 Results
GFL posted its highest-ever revenue for the second quarter in a row. Adjusted EBITDA rose by 24.6%. It posted a free cash flow of $177.1 million while cutting its cost of capital. For example, it offered a private placement of $600 million at a 20% premium to its stock price. Its $750 million secured notes are at the lowest coupon in the company’s history.
Bears, who have a modest 3.52% short float against the stock, will not see much headwinds from Covid-19 hurting the business. In Q3, easing restrictions helped lift waste management volumes sequentially. Conversely, the commercial and industrial collection is negative headwinds. Furthermore, in the Midwest U.S., Covid-related disruptions hurt the volume recovery. Still, liquid waste revenue in Canada grew by a solid 1,300 basis points.
On the mergers and acquisition front, GFL closed the WCA acquisition on Oct. 1. It recently closed its acquisition of the Waste Management (WM) and ADS divestitures. With that out of the way, the company may execute its integration plan next.
Clear Plan Forward
GFL has a simple and clear plan to build long-term shareholder value. As shown below, integration may weaken near-term margins. But management proved it and its dedicated staff outperforms market expectations. This suggests that operating margins will keep rising.
Growth in solid waste revenue, driven mostly by acquisitions, would explain the stock’s recent jump from the sub-$20 in late October to a high of $28.90 this month.
As shown above, acquisitions drove solid waste revenues by 17.4% and 22.2% in Canada and the USA, respectively.
GFL has $6.059 billion in debt and net leverage of 4.14 times. This is down from 7.68 times leverage in Q4/2019. The firm lowered its leverage by bringing in new equity at attractive terms. It improved its credit profile to lower its cost of borrowing. And with leverage targeted in the mid-4s in the near term, investors should not look at GFL stock as expensive.
Margins are likely to keep rising. Realizing synergies will expand EBITDA margins next. During the Covid-19 pandemic, CEO Luke Pelosi thinks the business may rise from the mid-20s margin to the high 20s range. For example, it will benefit from a growing liquid and soil business.
Wall Street analysts are bullish on both GFL and Waste Management. Income investors will prefer holding WM stock for its 1.89% dividend yield, compared to an almost negligible 0.14% yield with GFL stock.
Data courtesy of SA Premium
In the last month, GFL outperformed Waste Management by a wide margin:
Furthermore, WM is only up 1.27% in the year-to-date period. GFL’s 65.83% YTD rise already rewarded investors who bought the stock for its growth. Naturally, there are increasing risks that GFL stock may fall if there is a stock market correction. Profit-takers may sell GFL to lock in the gains.
Waste management is a necessary service, so the government and commercial industry is not going to cut spending. The government will want to increase its capital spending on infrastructure. The stronger cash flow increases GFL’s cash levels. If the opportunity arises, another M&A deal could once again lift its revenue growth rate.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.