Solid waste stocks have enjoyed a good run of late, and Advanced Disposal Services (NYSE:ADSW),
the latest entrant into the publicly-traded group, has gone along for
the ride. The enthusiasm isn't unreasonable on the surface, as ongoing
growth in housing, economic growth, reflation, and the prospect for a
less environmentally-focused administration all support a generally
favorable outlook for the industry.
For Advanced Disposal in
particular, there are also company-specific drivers that support a
bullish growth outlook, including the prospect for further accretive
M&A. All of that said, the valuation here seems more than healthy to
me, particularly given the company's vulnerability to higher rates and
the possibility that interest deductibility may go away in the process
of corporate tax reform. While I do like the outlook for growth and
expanding margins, I can't get comfortable with paying a double-digit
multiple on forward EBITDA nor assuming ongoing double-digit FCF growth
on a long-term basis.
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Even With Strong Growth Prospects, Advanced Disposal Services Looks Pricey
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