The Canadian Investor - Canada vs. U.S. Series - Let’s talk garbage!

Episode Date: May 26, 2020

In our second episode of our Canada vs. U.S. series we compare two waste collection companies. We discuss the dual listed Waste Connection and compare it to its big brother, the U.S. based Waste Management. We finish the episode with which company we each prefer.Enjoy the second installment of our Canada vs. U.S. series!Tickers of stocks mentioned : WCN, WCN.TO, WM--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

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Well, first of all, my apologies for not bringing you guys an episode last week. So that was all my fault. I was under the weather. I was not feeling good, but you can rest assured that it's not COVID-19. It was unrelated to that. But we're back and we're going to be talking about waste connection and waste management today. Before we get started, Brayden, how's it going? I'm good. It is so nice out right now. I'm up at my cottage before I have to head back into the office eventually.

And man, it is like 27 at the lake today that's degrees oh obviously this is a canadian show um it's great man it's great and this should be another good episode last week we did or not last week but two weeks ago we did dollarama and dollar This week, we're doing garbage. Waste Management Inc. versus Waste Connections, tickers WM on the New York Stock Exchange, and then tickers WCN on the TSX and the New York Stock Exchange. Waste Connections is dual listed as a Canadian company, but most of them do almost all their business south of the border. Obviously, Waste Connections has a big presence in Canada as well.

But did you look what the geographic breakdown is in terms of revenue for Waste Connections? No, I didn't go into that much detail. I know, like you said, they do most of the business in the U.S. and part of it in Canada, but obviously we're the little brother over there. But I'd have to dig in a bit more. Unfortunately, I don't have that. It's all good, dude. You were doing the homework today, reading through their conference calls, or sorry, listening to the conference calls on their latest Q report.

What were your main takeaways? What did you find out? I know we talked a little bit before the call and you had some good insights. Yeah, so it was really good. I mean, I'm not an expert in waste collection by any stretch of the imagination. So there was a lot of common themes

that I found in both conference call as I did not have the chance to listen to all of it, but I went through what they were saying and some of the analyst questions for both sides so I did get a good idea of what management was saying so for both of them they do have some commercial but also residential business they also both own landfills so they do get revenues from all of that the common theme was that commercial business was obviously down if businesses are not open. They're not using their services as much. Waste management did mention

that they're being very flexible with its commercial partners, allowing deferral of payments and things like that. Waste Connection had the same type of thing in terms of saying that the commercial business was down and residential for both sides was up. In terms of the overall business, I think Waste Connection was a bit up in their first quarter, but they did see their revenues go down by the end of the quarter, like a slowdown in revenue. Waste Management, there was a slowdown in revenue, but again, mostly related to COVID-19. From what I could get, both companies, at least what they're saying on their conference call, they were very supportive to employees. Waste management guaranteed all its employees 40 hours a week during the COVID-19 pandemic. They did remove any overtime in order to ensure that all employees get to work 40 hours,

but also reducing their costs by doing so as well. But they wanted their employees to know that. Both companies have paid sick leave for employees. Waste Connection also mentioned that they were offering paid leave for employees to take care of loved ones so their employees don't have to decide whether they need to come to work and be sick or choose between coming to work and taking care of loved ones. So those were really interesting things for both sides.

In terms of, well, I'll probably come back a little more through their conference call, some of the details I got. But those are the main lines. Actually, one last thing I forgot to mention when we were talking before that is they actually, both Waste Connection and Waste Management, they get revenue from the recycling that they do. So both of them mentioned that there was pressure on some of the raw materials when they recycle and they resell that. So they saw pressure on those margins over there. So what that means is when they recycle, for example, certain metals and they're reselling it, the value of those commodities went down. So obviously they were making a bit less money. So those were the big things I noticed on the conference call. Sure thing. That's very insightful. Thanks,

Simon. So let's get an idea of what we're working with here. So I pulled up the NYSE version of WCN so that we're comparing US dollars to US dollars here. Waste management trades for $42 billion in market cap and WCN Waste Connections trades for $24 billion in market cap. So for argument's sake, it's roughly twice the size. Waste Management does, however, three times more in revenue. So you can already see from a valuation perspective, Waste Connections is trading at a much higher premium of 41.5 times earnings. That's their price to earnings ratio. And Waste Connections is trading at a much higher premium of 41.5 times earnings. That's their price-to-earnings ratio. And Waste Management at 25 times earnings. From a price-to-sales ratio, 2.7 on Waste Management and 4.4 on Waste Connections. So for a lot of things,

on Waste Connections. So for a lot of things, valuation wise, waste management, you're looking at roughly double. And the reason for that is Waste Connections has been an absolute powerhouse in the acquisition space. So I mean, you're paying up. We talked about this a little bit earlier, Simon. I think these business models are absolutely incredible. I'll start with that first. You are collecting revenue on collecting garbage. You are now collecting a commodity that you can make another stream off of. You have the transfer stations. You're basically collecting revenue on all facets of the business model, which is just incredible. So they are very, very good business models.

And it's been fragmented. And that's where Waste Connections has really, really been aggressively buying competitors and consolidating the garbage space, garbage and recycling space. And they have done incredibly at it. So to give you an idea, Waste Connections has a 10-year compounded annual growth rate on their revenue of just north of 16% and just north of 17% on free cash flow. And they have been an absolute dividend growth monster. 10 years ago, the dividend was 5 cents a share, and it is currently 67 cents a share. So in 10 years, they've more than 10x the dividend. It's been a really good run for them. They seem to have the secret sauce in terms of acquisitions. I don't know what their business looks like organically. Their annual report would have some sort of organic growth metrics in there,

but this is a primarily growth by acquisition story. Waste management, on the other hand, is a bit of a slower grower. They haven't exceeded a 10% revenue growth on a 10-year financial statement here that I'm looking at. That being said, it's been a dividend grower. It's been a free cash flow generator.

And it's a very good business model. And you're paying a much less premium for slower growth. Me personally, I'd rather pay up for the growth. But it's important to mention, this is a growth by acquisition story. So what does acquisitions look like? How much of that industry is really left unfragmented for them to take advantage of um and and simon you had mentioned potentially a slowdown in acquisitions because of covid as do-it-yourself investors we want to keep our fees low that's why simone and i have been using questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees.

They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just

going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Yeah, that's what they mentioned during their conference call that Waste Connection still had some talks with current acquisition targets. They did mention that it could slow down some of their acquisitions by at least three months,

potentially more. They also mentioned that they will reduce capital expenditure because of the current situation. That was also something that W management didn't mention in their their conference call um and uh so yeah they the waste connection mentioned too that they would be opportunistic so that's actually their word i wrote it down because it's like oh yeah that's um that's i think encapsules it quite well um so they'd be opportunistic um i made waste management sounded like as well, they'll be opportunistic for acquisitions. They have one that will be closing later this year, waste management. I can't remember what the name of the company is. I thought I wrote it down, but I guess I forgot.

But they have an acquisition that's closing this year that will probably help their revenue a little bit. I don't know how big of an acquisition that is but it is facing regulatory scrutiny in terms of approval they did not seem to concern about that though when they they mentioned for for waste management so that's going to be something to look at in terms of dividend Braden did mention that so both of them their dividend is well covered by free cash flow looking at the most recent statements but even if we look at last year waste management was covered about 35 40 percent and waste connection was covered at about 20

percent so that means they both have a lot of room to play with when it comes to their dividend waste management mentioned that their dividend is you know they don't see any any of their dividend going management mentioned that their dividend is you know they don't see any uh any of their dividend going away for the rest of this year so that's good news they did mention however that they stopped their buyback program at the end of march 2020 their stock buyback mainly because of the uncertainty i think that's a really good move waste connection i can't remember if they said they would continue their dividend, but I really can't see them cutting their dividend. It would make no sense. They seem in good shape to keep growing it or at least keep it stable at the very least. thing in terms of stopping buybacks. So that would be the only thing I think to me would just be prudent right now. Even if they could afford it just from a, you know, the way it looks to people,

it's not a good optic to continuing to do share buybacks while a lot of companies are struggling, a lot of people are. Just from an optics perspective, it'll be interesting to see whether they do buybacks or not. But that's kind of my two cents on those. Did you want to talk about the balance sheet, Brayden? Or do you want me to talk about that? Yeah, you can go ahead. I have another statement up so I can pull it up. I was just going to say, performance wise, five years, waste management has done around 100% in five years, which has been an incredible performance. WCN, on the other hand, even better with a 166% gain over five years as of today's close. You can get an idea, just trying to paint a picture in your guys' mind of when comparing these companies,

I look at these as, you know, as much smaller, faster growing, but trading at a much higher multiple valuation wise compared to a bigger, slower growing, potentially more well-established business. I mean, both of them are very well-established. They're big, big companies. But just to give you an idea, and Waste Connections has just been such an incredible performer for a lot of TSX investors. And I've never owned the stock. I think you're paying up for safety. And I'm interested to see, before we talk about the balance sheet, Simon, what your take is on that. Because I look at this company and I think big institutions, people holding for clients are buying something like waste connections or like waste management for pure safety from a lot of perspectives. The business is garbage. Garbage is not going away. There's nothing more safe from a business perspective,

business model perspective, than these business models, garbage and recycling. So I'm curious, recession or not, if you're seeing influx of capital go into certain businesses because of that safety, and you might be overpaying for it if you're, you know, if you can stomach a little bit of volatility to find something that has higher growth or similar growth at lower multiples. And I wonder if you look at it the same way, because I know I do. I look at something north of 40 times earnings for fast growing, but not as fast as other things that are in that space. And are you paying up for safety here? Yeah, you probably are. I know

Waste Connection has been pretty highly valued for for quite a bit though i've had it on my radar for for a little bit it seems like and the multiples have always been pretty high yeah i don't mean from covid i don't mean from covid i just mean from you know it's recession proof as you could possibly think right yeah yeah i mean you can even see it like i kind of see those a little bit like infrastructure companies because it is when you think about it you can make an argument that it's part of the infrastructure when you think about it a little more it's not like it's not a road it's not you know things that we normally associate with it but yeah reality is they have businesses they do be business to business they do business to

i guess governments when you look at municipalities for the most part um so like they mentioned at least uh in both conference calls um yes their commercial side has gone down a little bit for obvious reasons um if people are not doing as much construction, if businesses are not open, if they're having trouble paying their bills, obviously it's going to affect what they're doing in terms of payment. But then they have the residential side that's doing quite well. So in terms of businesses being safe, you're probably paying a bit more for that safety. Even waste management, I mean, the multiples are lower, but they're still not cheap in terms of the growth that you're probably paying a bit more for that safety even waste management i mean the

multiples are lower but they're still not cheap in terms of the growth that you're getting so you can definitely make a case that you're you're paying a bit more for safety here okay yeah for sure i totally agreed and and i just want to harp on that in comparison like from my own opinion, is waste management at 25 times earnings for a garbage, no pun intended, 3% compounded annual growth rate on their revenue is just not even at all exciting to me. And that's where I look at this and go, people are paying for that safety. And yeah, they'll grow their dividend a lot over the next 10 years and more to come beyond that. And both of these companies will. So I'd be owning them both for dividend growth. Here, I'm not going to give away what my pick is yet, because I think we'll do that at the end. But

I'm not going to give away what my pick is yet because I think we'll do that at the end. But waste management looks super expensive compared to its growth at 25 times earnings and just very meager, meager growth on top line free cash and earnings is just something I would never personally touch. I'm giving away hints here. Do you want to talk about the balance sheet? I'm seeing here both really solid balance sheets, as you could imagine. Waste connections with just a little over a billion in current assets and a little over 6 billion in current assets for waste management being much, much bigger. Total assets of $27 billion compared to $13 billion. So again, on a lot of metrics, you're looking at it as twice the size in comparison.

Yeah, that was my reaction too. So when we were looking, I remember last time we did Dollar General and Dollarama, there was some pretty big differences when it came to balance sheet. But these two are very similar. Obviously, waste management is bigger. So everything's a bit bigger in terms of numbers. But there's, you know, I don't see really any red flags from either side.

Their interest payments are well covered by their revenue and their gross profits. So it's not cause for concern for me. So yeah, I really don't see much of a difference. In terms of overall, I mean, I guess we'll give our pick towards the end. But yeah, I do have one that I prefer a bit more. So I won't give too much until we get to that. Well, I don't know what else to talk about with these companies. So how about we get to it?

I will start first. Waste Connections is a company that I have wanted to purchase. It's been on my watch list basically forever as a TSX. It's been on my watch list basically forever as a TSX. You know, I studied the TSX like a lot just because I try to gain some sort of insight from my customers. But there's tons of analysts south of the border on U.S. companies. So that's where I really focus. And Waste Connections has been something that's been, I think, super expensive, and that's why I haven't paid for it. And it's one of those things where you're just going to have to pay up for quality.

I think it's an incredible company. I think they have the sauce when it comes to acquisitions. There's just some companies that know how to make incredible acquisitions time in and time, like over decades. Like it's not like they made a couple good acquisitions. It's management has demonstrated decades of tremendous acquisitions. And even if organic growth is in the low, you know, 5% or lower, it still seems like a consolidated space with tons of run room for waste connections. And I just don't know why someone like Waste Management is not aggressively pursuing acquisitions because that has clearly been the play for investing capital in the garbage space.

for investing capital in the garbage space. So without a doubt, I would be purchasing Waste Connections over Waste Management. I don't know if I'm purchasing it here. It seems expensive, but at 17% free cash flow growth, you are going to be paying those high multiples, north of 30, sometimes north of 40 with a lot of the software companies. Constellation Software growing free cash flow like 25% a year, trades at 80 times earnings and it continues to just go up and up and up. So it's a long way of me saying WCN is a tremendous company for TSX investors.

It is a dividend growth monster. And it might look expensive here, but 10 years out, you might 10X the dividend and you are going to be laughing. So that is my take. I am curious what the acquisition stories look like moving forward. And if I owned a position, I would be able to tell you the ins and outs of what that might look like.

I don't currently. So that's why I don't own it. Know what you own. It's literally the most important part of investing. So yeah, I mean, I got to take WCN here, man. Absolutely, without a doubt. What about you? Yeah, I mean, it's not an easy choice. I would say if you're a retiree and you're looking for income, then hands down, waste management, I think, is the safer bet here because your dividend is quite high or they're still increasing it. It's safe. It's going to be more steady than Waste Connection. The upside might be a bit higher for Waste Connection. If I were to start a position in Waste Connection, though, I'd wait until the end of this

year just to see what happens with all these acquisitions and the uncertain times. I'd be very interested in seeing, maybe they'll get some really good deals and they'll be able to boost their earnings because companies are just struggling and they're able to pounce on it and just acquire and get some even better deals. So I'd probably give it till the end of this year

just to see what happens. If I'm a retiree, like I said, I would go for waste management. It's a 2.2% yield versus 0.8% for waste connection. So that makes quite a big difference. And you're much higher than the different treasury yields as well in terms of bonds if you're comparing to that. So I guess, yeah, it really depends what you're looking for. If I were to choose, given that it's more established right now with the uncertainty, I would probably choose waste management. But again, I think I could probably make an argument for both if I kept going.

But definitely, if you're looking to invest in these companies, do some more digging. So just make sure you look at what percentage of their business is of their business the US versus Canada, what percentage is commercial versus residential, what their margins are, whether we didn't go over the return on investment, invested capital, or return on equity. If I remember correctly, waste management does a little bit better on that. But you'd have to dig in a bit more in those metrics, which only did a high level. Yeah. So, I mean, I guess I'll pick waste management, but I think it's almost, yeah, it's almost a coin flip for me, to be honest. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using

Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today

and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra

money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. So we're two for two with different picks. Let's see how long we can go on this. I love this. This is what's amazing about investing, right? We both have very similar investing styles. We both, in a way, like a lot of the same companies. And we have two different outcomes on both of them. I've taken the Canadian pick both times. You've taken the US pick both times. Just saying to all of our listeners here, who's the loyal one? Just kidding. It's really hard to go wrong.

What you said about the retirees, I agree with you. Waste management, I look at it like a stock bond. What Buffett was describing in a book called Buffettology, that's not actually written by Warren, but is basically all the learnings of Warren and a lot of his investing checklists and that kind of stuff. It's called Buffettology if you ever want to read it. It's a great book. And he talks about stock bonds or like a company that he looks at instead of collecting, because Warren has been very vocal about not liking bonds. He's been very vocal about it. And he has these stocks that he

buys that he looks at that are very safe, will pay you a yield on your capital there, aka dividend, on your capital there, aka dividend, and will be comparable rates to a T-bill and is very, very safe, very, very stable, waste management is the exact fit to that. I think that's why it trades at 25 times earnings for a company that's growing revenue at 6% a year is a good year. To me, that's not great. And to anyone, that's nothing to write home about. But that's why is because you get that safety, you're going to get that dividend that's going to continue to rise. It's going to perform at least market average. And that's where it fits in a portfolio. It has a definite purpose. Waste Connections, for me, as a long-term investor, I see way more upside there. So this is one of those situational picks and really depends on your portfolio and you.

So Simon, let's talk about what I'm really excited about. Introducing, drum roll please, the Canadian Investor Podcast Index. So here's the rule. Go to getstockmarket.com right now at the bottom there's a form you type in the ticker you write why you're going to give me a stock pitch of why you would take this ticker and we are going to see all the companies that come in and we are going to see all the companies that come in, and we are going to create the Canadian Investor Pod Index. And we are going to, every week, talk about its performance. We're going to backtest it, and we're going to give you the results.

We should probably do a whole episode on what the picks are. This is super exciting. I'm excited to see what all of our listeners are investing in, why they're investing in it, that thesis more than anything. And don't give me 80 pages worth to read because that's boring. But maybe a paragraph or two, why you like this company, what their prospects are, talk about the valuation, and we are going to create the index and report on it. And I can probably put this on stratosphereinvesting.com as well, and it'll be a little bit of a community thing.

So, Simon, am I missing anything on the Canadianadian investor pod index and we're going to create another episode a little snippet a little five minute thing to talk about this but getstockmarket.com you put it down there you give me the lowdown am i missing anything simon uh no i think you you went over it pretty well so i guess I guess that must be it for this episode then. Yeah, yeah. I think that's good. We have a couple more Canada versus U.S. comparisons to get in the mind of what we're thinking

when we look at two competitors and one that's listed in Canada, which is always nice to have that option and invest in CAD on the TSX. So as always, go to GetStockMarket. and CAD on the TSX. So, as always, go to GetStockMarket. But this time, I want you to pitch me your favorite stock. And, Simon, is this Canadian companies only? No, no, no, everything, right?

Yeah, I think everything. Yeah, yeah, yeah. There's no point in... Why not? Don't limit it to the TSX. Okay, how about this? I hope no one puts Luckin Coffee in there. They're about to be delisted.

Yeah, exactly. Yeah, that's another thing in the news right now, right, is the Chinese potential delisting. All right, so any stock in North America, let's say in North America, it's got to be on the NYSE, the TSX, or the NASDAQ, maybe even the Ventures. Who cares?

Give me it. I want the pitch. We will track that. We will give you the complete lowdown, and we will see you guys next week. The Canadian investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions. Thanks for listening to this episode of the Canadian Investor. To get a list of the top Canadian dividend stocks right now and other valuable investing resources, go to GetStockMarket.com.