GFL Environmental stock is a pass, this investor says

GFL Environmental (GFL Environmental Stock Quote, Chart, News TSX:GFL) looks to be on a roll with a second major acquisition in 2020 now under its belt, but portfolio manager Rob Lauzon says the recently public company may have a more difficult time keeping up its M&A pace.

Earlier this month, Toronto-based waste management company GFL, now the fourth largest diversified environmental services business in North America, completed a previously announced deal to buy privately-held WCA Waste Corp, a company with a network of solid waste assets across the US, for US$1.212 billion.

GFL said it would be financing the deal in part with US$600 million from a recent private placement, with the rest coming in cash and part of the company’s revolving credit facility.

The deal comes on the heels of a June announcement to acquire the divested assets of Advanced Disposal Services from US giant Waste Management for US$863.6 million. Both acquisitions are part of GFL’s wider plan to expand its footprint in the United States while at the same time pursuing organic growth in its current markets.

“We continue to deliver on our goal of pursuing strategic and accretive acquisitions to grow our business,” said Patrick Dovigi, founder and CEO of GFL, in an August 12 press release. “The WCA transaction, which we have been working on for over a year, is another example of this commitment.”

GFL jumped into the public arena earlier this year with a $1.4-billion IPO, which helped the company pay off some of its debt. The successful public offering came half a year after an aborted IPO in November 2019 which was pulled when it appeared share pricing would be below the marketed range. GFL, which has yet to turn a profit, had a cash balance of $724 million as of its latest reported quarter, the company’s second quarter 2020 delivered in early August. So far, GFL’s share price has climbed 25 per cent since
its debut in March.

Lauzon, managing director at Middlefield Capital, thinks that worries over its debt load should give investors pause.

“We continue to own Waste Connections,” said Lauzon, speaking to BNN Bloomberg on Monday. “When they IPO’d GFL we just didn’t see a need to switch out of a company that we’ve owned for years —and actually we owned Waste Connections in its prior as an income trust, before BFI was taken over by Waste Connections.”

“GFL had more debt, which we didn't like and as a private company they were growing very quickly by doing acquisitions and levering up the balance sheet and that's where they got all the debt. They were able to pay a higher price to do these acquisitions [but] I’m unsure now being a public company whether they’re going to be able to grow at the same rate via acquisitions because the public markets have their eye on GFL’s debt load levels, so they have to compete with equity and companies like Waste Connections in the States have higher equity multiples,” Lauzon said.

“So, I would just stick with waste management in the US. With Waste Connections, we haven’t had a reason to switch into GFL yet,” Lauzon said.

GFL, which is expected to release its third quarter results on November 4, saw revenue grow by 19.5 per cent year-over-year to $993.3 million in its second quarter with adjusted EBITDA rising 23.4 per cent to $261.5 million. GFL’s loss was $0.32 per share.