Paul Harris, CFA GFL Environmental Inc. GFL-T BUY Nov 17, 2022

There's room for growth as society puts more effort into disposing waste. A little volatile. Collecting garbage is moving towards automation. Operates in an essential, but growing sector.

GFL operates a playbook of growing through acquisitions with a leveraged balance sheet, by consolidating small players in one industry (waste management). This playbook is usually referred to as a “roll-up”. GFL’s CEO has demonstrated a decent history of execution in the last few years, with 5-year revenue growth of around 18%. He also writes a good shareholder letter. As the founder, he has certainly delivered growth, with sales up 10X since 2015. This article from last year is a good read on him. GFL continues to reinvest heavily into growth. Due to the stability of the indusry, and recurring nature of the business, the debt level is quite high, with net debt/EBITDA consistently more than 5.0x. Valuation is reasonable compared to the historical average, 14.1x EV/EBITDA (historically range from 13.8x to 19x). Overall, a decent name, but investors need to be comfortable with the debt level and entrust the CEO with his capital allocation skills.
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Very prominent brand (visible across Canada). Stock performance strong. High debt levels a concern. Unsure of future business given leverage. If debt falls, would expect better returns. Cheapest valuation in waste management space, however investors have to weigh risk of debt levels. Earnings very stable (sticky customers) with steady demand. 

EPS was essentially flat vs expectations of a tiny loss. Revenue of $1.8B beat estimates by 1.2%. EBITDA of $455.7M beat by 3.4%. GFL's revenue, Ebitda and free cash flow exceeded consensus, reflecting benefits from last year's solid-waste divestitures and efforts to shed low-margin contracts. Reported revenue was flat due to the 2023 divestitures but included 4% organic growth in solid waste, where price increases offset volume declines, and which drove 160 bps of segment margin expansion. Environmental Services revenue fell 10% organically amid reduced emergency-response activity. Free cash flow topped expectations, though GFL's net leverage rose to 4.3x due to a $322 million increase in debt. The company used C$112 million for acquisitions and expects to spend C$600-$650 million on deals for the full year. However, net leverage is still seen approaching 3.65-3.85x by year-end. Guidance WAS increased, but only marginally. The stock is not cheap at 44X earnings, but we still think it is buyable. 
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Environmental services as a group have been performing well. Recently turned profitable. Lots of opportunity for consolidation. Technically doing well in a sloppy market.

Terrific management. Market's underpriced it because it grows by acquisition, and has taken on a bunch of debt. They've put an asset up for sale, probably earning $6B, and debt will come down. Just as profitable as competitors, but trades at a discount. Yield is 0.1%.

The space has been a fantastic investment. There aren't a lot of options for getting rid of garbage. Once you're on their books, they can gradually increase prices. The issue is that valuations are quite high, and always have been. High barriers to entry. When stocks come off, the expensive ones come off the fastest.

This name's valuation is slightly better than others.