A Member of Pat McKeough’s Inner Circle recently asked for his advice on a waste management company that’s active in the eastern U.S - Casella Waste Systems Inc.
Pat likes the company’s consistent revenue and earnings growth and the price performance (the stock has returned 133.7% against the S&P’s 83.2% over the last five years). However, Pat notes the firm’s high valuation of 181.4x forecast earnings means those earnings have to grow significantly to justify the current share price.
Casella Waste Systems Inc. (Symbol CWST on Nasdaq; www.casella.com), is a Vermont-based waste management company that services nine U.S. states (Vermont, New Hampshire, New York, Massachusetts, Connecticut, Maine, Pennsylvania, Delaware and Maryland) through 64 solid waste collection operations, 29 recycling facilities, 8 disposal facilities, 3 landfill gas-to-energy facilities, and one landfill permitted to accept construction and demolition materials.
Casella was founded in 1975 by Doug Casella, who used a pick-up truck to collect waste from customers in Rutland, Vermont, and nearby Killington. His brother John joined shortly after that. The firm went public in 1997 at $18 a share.
In September 2023, Casella completed the acquisition of the assets of Consolidated Waste Services LLC for $219 million. That firm operates as Twin Bridges out of Clifton Park, New York.
Twin Bridges’ facilities include two waste collection operations, a recently built transfer station, a “state-of-the-art” material recovery facility (MRF) with robotic technology, and an office building. Twin Bridges was expected to generate $70 million in revenue in 2023 and add immediately to overall profits.
Casella’s total revenue rose 64.2%, from $660.7 million in 2018 to $1.09 billion in 2022. Excluding one-time items, earnings increased at a faster rate of 109.5%, from $27.2 million, or $0.61 a share, in 2018 to $56.9 million, or $1.10 a share, in 2022.
Growth Stocks: Casella Waste System’s Revenue and Earnings Grow as Acquisitions Add Up
In the three months ended June 30, 2024, Casella’s revenue increased 30.2%, to $377.2 million from $289.6 million from a year earlier. That gain reflected acquisitions, as well as higher pricing for disposal (4.8%) and collection (6.2%) services. The company acquired five businesses this year through August 1, 2024, with over $100 million in total annual revenue.
Excluding one-time items, the company earned $12.5 million, or $0.22 a share, in the latest quarter. That was down 33.5% from $18.8 million, or $0.36.
Growth by acquisition adds risk, but Twin Bridges and the latest additions such as LMR Disposal and Whitetail Disposal should be a good fit for Casella. The company already has a presence in the greater Albany, New York, area where Twin Bridges is based, and it has a similar customer mix.
All in all, the company’s outlook is positive, and demand for its essential services isn’t likely to be affected by any economic slowdown. However, it needs more growth to justify its current stock price, let alone go higher.
Recommendation in Pat’s Inner Circle: Casella Waste Systems Inc. is a hold.
