Over the past six months, Casella Waste Systems’s shares (currently trading at $99.29) have posted a disappointing 10.8% loss, well below the S&P 500’s 5.8% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Casella Waste Systems, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Casella Waste Systems Not Exciting?
Despite the more favorable entry price, we're cautious about Casella Waste Systems. Here are three reasons why CWST doesn't excite us and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
Investors interested in Waste Management companies should track organic revenue in addition to reported revenue. This metric gives visibility into Casella Waste Systems’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Casella Waste Systems’s organic revenue averaged 3% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
2. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Looking at the trend in its profitability, Casella Waste Systems’s operating margin decreased by 4.7 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Casella Waste Systems’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 3.8%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Casella Waste Systems historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.1%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
Casella Waste Systems isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 83.3× forward P/E (or $99.29 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our top software and edge computing picks.
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