Even With Strong Growth Prospects, Advanced Disposal Services Looks Pricey

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

Investopedia: Casella Waste - Even The Environmental Sector Has Challenges

Perhaps one of the more interesting lessons of the recession and this sluggish recovery has been the deconstruction of the idea of "safe" industries where investors can take refuge in bad times. Food companies have been squeezed by input-cost inflation, healthcare companies have seen patients disappear, and the environmental sector, too, has seen business deteriorate more than many would have guessed.

As a small regional player, Casella Waste Systems (Nasdaq:CWST) has a host of challenges. The company does not have the sort of scale that benefits giants like Waste Management (NYSE:WM) or Republic Services (NYSE:RSG), and its balance sheet probably precludes a lot of expansion on its own. Though there could certainly be some long-term value here, this isn't an especially safe place to wait out the market's turbulence.
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