After peaking above $30, the S&P 500 (SPY) declines at GFL Environmental (New York Stock Exchange: GFL) low. In addition to weak stock market sentiment, stocks face downward pressure. Bearish short-term interest rates are at 7.5% as futures price-to-earnings ratio. Magnification is about 60 times. GFL shares have a valuation grade of ‘F’, but have strong growth and profitability.
Why is the market reacting poorly to the GFL’s third quarter results published on November 2, 2022?
Q3 2022 revenue growth
In the third quarter, GFL’s revenue reached $1.83 billion, up 32.6% year over year. The company emphasized that its 8.6% solid waste price and 2.1% surcharge are the highest in the company’s history. He said it contributed to the big increase.
Revenue from the Environmental Services segment was $920.4 million, an increase of 28.2% from the prior year. The GFL benefited from increased levels of emergency response activity, increased sales prices for used motor oil, and increased industrial collection and disposal activities.
Cost pressure from third-party maintenance and higher truck rental costs weighed on GFL’s margins in the quarter. However, these costs are showing signs of easing along with supply chain disruptions. Additionally, the company has an aggressive pricing and surcharge strategy to boost its profit margins next year.
GFL’s M&A aggressiveness is attracting bearish investors. Short floats are high because skeptical investors don’t think the acquisition will pay off. Last quarter, GFL completed six of his acquisitions. In 2022, acquisitions will add approximately $30 million to annual revenue.
By 2023, five of GFL’s renewable natural gas projects will be operational. By mid-to-late 2023, these projects will exceed RNG’s total of 6 million MMBTU. There are another 7 million of his MMBTU at his 7 sites in the pipeline.
The company is likely to report continued strong performance from its environmental services division. After gaining business momentum during Covid lockdown, GFL realizes acquisition synergies. The company operates on margins ranging from his 25% to his 26%. Maintain that profit margin as you gain market share in Canada. Additionally, Western Canada has a booming energy sector. Although it does not serve oilfield customers directly, it will benefit from relevant exposures in the region.
In 2023, GFL will improve efficiency. For example, optimize routes and their fleets. Commodity-related costs should start to come down.
Leverage from high debt and the impact of rising fuel and commodity prices are two of the main risks to the GFL. Last quarter, GFL reported his long-term debt of $9.358 billion. It issued an additional $155 million of long-term debt in the quarter and paid off $40.3 million. GFL has floating rate debt that requires funding. Debt servicing costs could rise unless credit ratings improve.
GFL has an interest cost of 6% of earnings. Interest costs for peers are around 2%. In the short term, the company does not have much maturity. However, maturity in 5 years requires a lower interest rate level.
GFL also has the option of reducing assets to pay off debt. This is an unlikely route as acquisitions are working positively on earnings.
Cost inflation is a risk. This could reduce GFL’s return on capital. The company has pricing power that allows it to pass on higher costs to its customers. However, if customers can’t stand price increases and look for alternative suppliers, GFL’s revenues may decline. Central banks continue to raise interest rates to keep the pace of inflation in check. This benefits the GFL.
Stock grades and points
The GFL stock has a low value grade, dropping from a D three months ago to an F.
PER could decompress if the stock market corrects the decline.
Other companies in the industry, such as Waste Management (WM), have also fallen. WM’s stock price he peaked at over $175 in August. It is currently trading at around $157. WM stock has an unfavorable value grade. Conversely, GFL stock gets a B+ on profitability and Waste Management gets an A.
In 2022, the market has lowered the GFL. Investors are adjusting for the risks associated with the takeover spree. As long as management expands gross margins over the next year or two, the stock won’t fall further.
GFL remains an attractive stock to consider buying.