Deutsche Bank is finding new opportunities in “trash.” Analyst Faiza Alwy on Wednesday initiated coverage of North American waste services stocks with a positive view, recommending investors look into Waste Management and Waste Connections as attractive opportunities in the industry. The solid waste industry is made up of three stages: collection, processing and transferring as well as disposing of solid waste into landfills. The waste and recycling industry generated about $91 billion in 2022, about $16 billion higher than in 2019, Alwy said, citing data from the Waste Business Journal. “The sector presents an opportunity for compounding defensive growth due to largely recurring volumes, annual price adjustments and efficiencies through vertical integration leading to steady streams of cash flow,” Alwy wrote in a note. “We like the generally favorable competitive dynamics amongst large players (with fragmented regional competition), but we believe the consolidation theme that has favored the sector over the last few decades has mostly (albeit not entirely) played out.” Alwy initiated coverage of Waste Management and Waste Connections with a buy rating on each. His $241 price target on Waste Management suggests 15.7% upside, and his $189 price target on Waste Connections implies the stock has roughly 14.4% to rise. This year, Waste Management shares are up 17.2%, while Waste Connections has added 11%. Alwy also initiated Republic Services with a hold rating and $203 price target, saying all three stocks are “compounders over the long-term.” WCN WM YTD mountain WCN and WM year to date “While larger companies may have fewer ‘growth’ opportunities, in our view, the attractiveness of the sector is in its defensive and relatively simple business model. We value the stocks on a [free cash flow] basis,” the analyst said. Alwy named Waste Management as a “leader in recycling,” pointing out that the company is managing more postconsumer recyclables than any other in North America. The company is also investing in materials recovery facility, or MRF, technology at new and existing facilities in an effort to lower operating costs and improve plant efficiency, she said. Waste Connections, meanwhile, has lower exposure to recycling compared to its peers, as recycling accounted for just 2% of its fiscal 2023 revenue, while it comprised 6% of Waste Management’s revenue for the period. Still, Alwy noted that recycling as a percentage of the company’s revenue is expected to increase over time, especially as the company invests in more technology behind recycling. Waste Connections is planning to invest $150 million, most of which will be used for renewable natural gas, or RNG, projects, she said. Additionally, Alwy initiated Casella Waste Systems with a hold rating and $206 price target, saying the stock has potential for “significant upside over time,” but also for higher risks around M & A execution. With that price target, she expects shares could add 7.3%. The stock is up about 15.1% year to date.
