Advanced Disposal Services At The Top Of The Heap In The Garbage Sector

Citing relatively more stable earnings growth, Barclays has started coverage of Advanced Disposal Services Inc (NYSE: ADSW) with an Overweight rating and price target of $25, which implies a potential upside of 24 percent over Friday’s close.

In addition to Barclays' initiation, other firms have weighed in on the stock as well.

Barclays noted that Advanced Disposal becomes its Top Pick in the sector, replacing Waste Connections Inc (USA) (NYSE: WCN), as it believes Advanced Disposal “presents an attractive valuation entry point into the municipal solid waste (MSW) space.”

“ADSW has a relatively more stable earnings profile due to its lower recycled commodity (2 percent of revenue) and E&P waste exposure (1 percent) compared to MSW peers,” analyst Jon Windham wrote in a note.

However, Windham expects the company to increase the pace of tuck-in acquisitions, which should boost revenue growth to an average of 5.4 percent annually in 2017 and 2018, compared to 3.6 percent for Republic Services, Inc. (NYSE: RSG) and 4.6 percent for Waste Management, Inc. (NYSE: WM) over the same time period. The analyst expects the company to spend $35 million–$60 million per annum for tuck-ins.

That said, the analyst expects the company not to pay a dividend or indulge in share repurchases until at least 2020 to reduce its leverage.

“[W]e estimate that ADSW will reach 3.3x net debt to adj. EBITDA by YE2019E, in line with average MSW net debt to adj. EDITBA of 3.1x. We estimate that each 1-turn reduction in leverage would increase the share price by ~$5, at a constant EV/EBITDA multiple,” Windham added.

At the time of writing, shares of Advanced Disposal were up 0.75 percent to $20.25.

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