This Garbage Stock Isn’t Garbage: Why It’s Time to Buy GFL Now

Introduction

GFL Environmental, a prominent player in the waste management industry, is emerging as a compelling investment opportunity. Despite being labeled a “garbage stock,” GFL is well-positioned to thrive in any market condition. Its future strategies set it apart from traditional players and should catch the investment community’s attention for several reasons.

Vibrant Industry Dynamics

At first glance, the world of waste management may not seem appealing. However, investing in waste-management stocks has historically proven to be beneficial. This sector experiences stable growth driven by a universal need for waste removal. As recycling and composting initiatives grow, the methods and complexities surrounding waste disposal have evolved, creating increased demand for innovative waste management solutions.

Moreover, the industry has successfully pivoted towards capturing renewable natural gas from landfills, further enhancing growth prospects. The robust waste volumes and the complexities involved in managing them translate into greater revenue potential for companies like GFL. The performance of major waste management companies has been impressive: Waste Connections, Waste Management, Republic Services, and Casella Waste Systems have achieved an average return of 59% over the past three years, outperforming the S&P 500’s 40% return during the same timeframe. Conversely, GFL has lagged, returning only 39% — a clear underperformance relative to its peers.

GFL’s Debt Challenges

Headquartered in Vaughan, Ontario, GFL executes about 70% of its operations in the U.S., minimizing exposure to tariffs. However, a significant hurdle for GFL lies in its heavy debt load, totaling approximately $6.6 billion due between 2025 and 2032. This figure aligns with around four times the company’s projected earnings before interest, taxes, depreciation, and amortization (Ebitda) for 2025. This stands in sharp contrast to the typical ratio of less than two times among industrial companies in the S&P 500, as well as the lower ratios of its waste management peers.

This high debt level stems from GFL’s rapid expansion strategy initiated under private equity ownership from BC Partners. While this ownership still holds about 24% of the shares, it raises concerns for investors. Historically, private equity firms are not inclined to hold onto publicly traded stocks long-term, leading to apprehensions about potential sell-offs.

Strategic Moves Forward

However, GFL’s recent moves indicate a shift toward financial stability. In January, GFL entered into an agreement to sell its hazardous waste operations for $5.6 billion, primarily to Apollo and BC Partners. GFL will receive approximately $4.3 billion in cash and maintain a minority stake valued at $1.2 billion. The proceeds are earmarked for settling around $2.7 billion in debt and repurchasing $1.6 billion in shares, likely from BC Partners.

Brandon Geisler, a portfolio manager at Fred Alger Management, views this divestiture positively, noting that solid waste operations are inherently more profitable, resulting in higher margins and better cash flow conversion compared to hazardous waste management.

Valuation Comparisons and Future Outlook

The market’s potential valuation discrepancies are intriguing. GFL’s solid waste sector is currently priced at about 13 times its Ebitda, while industry peers are trading at an average of 16 times. Following the sale completion, GFL will bolster its balance sheet, reducing debt and enhancing its investment-grade status, potentially leading to a recalibration of stock prices.

Wall Street analysts, including CIBC’s Kevin Chiang, project a 6% sales growth for GFL’s solid-waste business over the next three years. Chiang anticipates margins will expand by approximately two percentage points, placing GFL in a favorable growth trajectory when compared to its larger competitors.

With a target price of $53 and a “Buy” rating, Chiang sees significant upside potential for GFL’s shares, envisioning them reaching the mid-$50s as investors reassess the company’s valuation post-divestiture.

Conclusion: A Bright Future for GFL

The complexities surrounding GFL are yielding new opportunities as it embarks on a transformative phase. With debt reduction and a renewed focus on solid waste operations, the company is set to enhance free cash flow and overall financial robustness over the coming years. As CEO Patrick Dovigi aptly puts it, “Post-deal, we’re going to look like everybody else.” This alignment should facilitate GFL trading at a premium within the waste management sector — paving the way for investors to consider this seemingly unappealing stock as a savvy investment choice.