GFL - GFL Environmental Sees Improving Fundamentals Through 2024 (Rating Upgrade)
2023-10-12 17:15:55 ET
Summary
- GFL Environmental Inc. is a large environmental services company serving Canada and the United States with waste collection, remediation and related services.
- The company has shown improving financial trends, with growing revenue, increased gross profit margin, and soaring earnings per share.
- GFL Environmental is expected to experience growth, reduced debt, and improved margin spreads over time.
- I'm Bullish on GFL Environmental Inc. stock at around $32.00.
A Quick Take On GFL Environmental
GFL Environmental Inc. ( GFL ) (GFL:CA) is a large, diversified environmental services company serving Canada and the United States with waste collection and related services.
I previously wrote about GFL with a Neutral Hold outlook.
Due to improving margin spreads likely through 2024, pricing power, strong growth and lower debt over the quarters ahead, my outlook is Bullish [Buy] for GFL in the near term.
GFL Environmental Overview And Market
Vaughan, Ontario-based GFL [Green For Life] was founded in 2007 to provide a range of waste management, remediation, and recycling services in Canada and numerous U.S. states.
The company is led by Founder, CEO and Chairman Patrick Dovigi, who previously worked at Lower East Capital Partners and has managed Waste Excellence.
The firm’s services include non-hazardous solid waste management, infrastructure and soil remediation, and liquid waste management services.
GFL’s solid waste management operations comprise the collection, transportation, transfer, recycling and disposal of non-hazardous solid waste for municipal, residential, commercial and industrial customers.
Infrastructure and soil remediation includes remediation of contaminated soils and related services, such as civil, demolition, excavation and shoring.
The company’s liquid waste management business includes the collection, transportation, processing, recycling and/or disposal of liquid waste from commercial and industrial customers, with over 40 liquid waste processing or storage facilities as of the end of 2018.
According to a 2023 market research report by Grand View Research, the global environmental health and safety market was valued at $49.8 billion in 2015 and is projected to reach $77 billion by 2030, producing a CAGR of 6.5% from 2023 to 2030.
The main factors driving forecast market growth are the growing amount of regulations required by environmental protection and governmental agencies globally.
GFL Environmental Inc.’s Recent Financial Trends
Total revenue by quarter has continued to grow; Operating income by quarter has moved up recently:
Seeking Alpha
Gross profit margin by quarter increased markedly in the most recent quarter; Selling and G&A expenses as a percentage of total revenue by quarter have trended slightly higher:
Seeking Alpha
Earnings per share (Diluted) soared in the most recent quarter:
Seeking Alpha
(All data in the above charts is GAAP.)
In the past 12 months, GFL’s stock price has risen by 32.54% vs. that of Waste Management’s ( WM ) fall of (0.27%):
Seeking Alpha
For balance sheet results, the firm ended the quarter with $62.1 million in cash and equivalents and $6.0 billion in total debt, of which only $4.4 million was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was $106.4 million, during which capital expenditures were $755.9 million. The company paid $44.3 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For GFL Environmental
Below is a table of relevant capitalization and valuation figures for the company:
| Measure [TTM] |
| Amount |
| Enterprise Value / Sales |
| 3.3 |
| Enterprise Value / EBITDA |
| 13.8 |
| Price / Sales |
| 2.2 |
| Revenue Growth Rate |
| 24.7% |
| Net Income Margin |
| -4.4% |
| EBITDA % |
| 23.5% |
| Market Capitalization |
| $12,100,000,000 |
| Enterprise Value |
| $18,150,000,000 |
| Operating Cash Flow |
| $862,290,000 |
| Earnings Per Share (Fully Diluted) |
| -$0.83 |
| Free Cash Flow Per Share |
| $0.29 |
(Source - Seeking Alpha.)
As a reference, a relevant partial public comparable would be Waste Management:
| Metric [TTM] |
| Waste Management |
| GFL Environmental |
| Variance |
| Enterprise Value / Sales |
| 3.9 |
| 3.3 |
| -17.3% |
| Enterprise Value / EBITDA |
| 14.1 |
| 13.8 |
| -1.8% |
| Revenue Growth Rate |
| 5.2% |
| 24.7% |
| 375.2% |
| Net Income Margin |
| 11.4% |
| -4.4% |
| --% |
| Operating Cash Flow |
| $4,300,000,000 |
| $862,290,000 |
| -79.9% |
(Source - Seeking Alpha.)
Sentiment Analysis
The chart below shows the frequency of certain keywords in management’s most recent earnings conference call:
Seeking Alpha
The company is facing commodity volatility, although management believes it is moderating.
Analysts questioned leadership about the effects of inflation on its pricing strategies, leverage target and margin expansion in 2024.
Management said that the firm is seeing a moderation in CPI but still expects a strong pricing environment ahead.
Leverage is expected to be reduced through organic cash generation and M&A.
Management also believes that 2024 will be ‘another outsized year’ in terms of margin spread expansion.
Commentary On GFL Environmental
In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted its pricing power and solid waste margin expansion of over 300 basis points.
The firm also completed its portfolio rationalization earlier than expected, receiving $1.65 billion in gross proceeds, $150 million more than originally expected.
With the divestiture proceeds, management paid down its most expensive floating rate, ending the second quarter "with our lowest net leverage in company history."
Management believes the firm is on track to have net leverage at less than 4x by year-end and the potential for mid-3s by the end of 2024.
Total revenue for Q2 2023 rose by 10.6% YoY, and gross profit margin increased by an impressive 4.8%.
Selling and G&A expenses as a percentage of revenue grew by 0.7% year-over-year, and operating income more than doubled to $116.0 million.
The company's financial position is moderate, with some liquidity, $6 billion in total debt and reasonable free cash flow.
Looking ahead, per the firm’s investor presentation , full-year 2023 revenue is expected to be $7.4 billion, or $55 million above pro-forma 2023 revenue, assuming divestiture effects.
Adjusted EBITDA margin is expected to grow from 26.5% proforma to 27% for the year.
In the past twelve months, the firm's EV/EBITDA valuation multiple has produced some volatility, as the chart from Seeking Alpha shows below:
Seeking Alpha
Potential upside catalysts to the stock could include improving margins, reduced debt load and improved positive effects of foreign exchange fluctuations.
Currently, the market is valuing GFL at lower multiples than Waste Management despite a higher growth rate.
With improving margin spreads, pricing power, strong growth and lower debt over the quarters ahead, my outlook is Bullish for GFL Environmental Inc. in the near term.
For further details see:
GFL Environmental Sees Improving Fundamentals Through 2024 (Rating Upgrade)