Waste hauler GFL Environmental has trailed its peers. With a transformational deal in the works, that's about to change. By Al Root

Waste hauler GFL Environmental is a catalyst-rich stock in a profitable industry, interesting in any environment and especially appealing in this one. Its plan for the future sets it up for success, and it should see little impact from artificial intelligence, politics, or the broader market. That's a rare and powerful combination that should catch investor attention.

Appealing might not be the first term that comes to mind with garbage, but it should apply to waste-management stocks. Historically, they are stable growers that do well in most market environments because they serve an essential, universal need. The way our detritus is being discarded is gradually becoming more complicated, as recycling and composting gain in popularity. The companies have also learned how to capture renewable natural gas from their landfills, offering another potential opportunity.

More waste volume and complex handling boil down to more growth -- and higher stock prices -- for garbage companies. Waste Connections, Waste Management, Republic Services, and Casella Waste Systems have returned an average of 59%, including reinvested dividends, over the past three years, beating the S&P 500 index's 40% total return over the same period. GFL, however, has returned just 39%, the only one of the group to underperform the benchmark.

The company, which is based in Vaughan, Ontario, also has offices in Raleigh, N.C., and conducts about 70% of its waste-management business in the U.S. It's unlikely to be affected by tariffs.

One big issue: GFL is carrying a lot of debt. It has some $6.6 billion due between 2025 and 2032, about four times 2025's earnings before interest, taxes, depreciation, and amortization, or Ebitda. Industrial companies in the S&P 500 typically operate with a ratio of less than two times, and other waste players are all between two and three times.

High debt is a legacy of GFL's ownership and strategy. Before its IPO in 2020, GFL was owned by private-equity firms led by BC Partners, which were happy to see founder and CEO Patrick Dovigi expand the company by rolling up other waste haulers. BC Partners still holds about 24% of the shares outstanding, which creates another problem for investors: Private-equity players typically don't hold publicly traded stocks for the long haul -- and no one wants to buy a stock right before a large holder liquidates a position.

All that is changing. In January, the company signed an agreement to sell its hazardous-waste-handling environmental services business for an enterprise value of $5.6 billion to Apollo and BC Partners. GFL will receive some $4.3 billion in cash proceeds and retain a minority equity stake worth $1.2 billion. With the cash, GFL will repay about $2.7 billion in debt and repurchase $1.6 billion of shares -- likely from BC Partners.

"They're selling their environmental services assets at a premium to where the current [company] is trading at despite the fact that solid waste is a better business...higher margin, lower capital intensity, better free-cash-flow conversion," says Brandon Geisler, a portfolio manager at Fred Alger Management.

The environmental services business is going for about 16 to 18 times estimated 2025 Ebitda -- depending on how investors want to allocate overhead. It leaves GFL's solid-waste business trading for about 13 times. Peers trade for an average of about 16 times.

There is little reason for a discount after the deal is done. GFL's debt will be reduced, and the balance sheet will be investment-grade. Less stock will be in the hands of private-equity players. What's more, GFL will still have the $1.2 billion stake in the environmental services business run by Apollo and BC Partners.

Looking ahead, Wall Street projects about 6% sales growth for the solid-waste business over the coming three years, with margins expanding another two percentage points.

"We see a path for the company's margins to expand at a greater rate compared with the Big 3," writes CIBC analyst Kevin Chiang, referring to Republic Services, Waste Connections, and Waste Management. He projects about 1.5 percentage points of margin improvement in 2025. Chiang rates shares Buy, with a $53 target price target.

With a better balance sheet and a renewed focus on solid waste, GFL's growth can beat the current targets, a strong catalyst for higher multiples after investors evaluate the remaining business. Seeing the valuation gap vanish after the sales would push shares into the mid-$50s from Tuesday's close of $44.18.

GFL's remaining stake in the environmental services business and a 45% stake in road paver Green Infrastructure Partners are worth roughly $4 to $5 a share. That's nothing to throw away.

So why the discount? For starters, it's a complicated situation and investors are waiting. The debt paydown and stock repurchase are coming, and the deal is closing. The company is hosting an investor event in February to help demystify the stock and the future.

Post-deal, "we're going to look like everybody else," says Dovigi. With the business and balance sheet restructured, he's focused on doubling free cash flow over the coming four or five years -- similar to GFL's performance between 2020 and 2024.

If he's successful, the coming catalysts will position GFL to trade at a premium in the waste space -- and as a winning stock.

Write to Al Root at allen.root@dowjones.com

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February 07, 2025 21:30 ET (02:30 GMT)

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