Meridian Waste Solutions, Inc. (NASDAQ: MRDN)
Typically, when a CEO barks that they are not in the business of producing garbage, the connotation is none too friendly. But, for the team at Meridian Waste Solutions, being full of garbage is a rally cry, promoting a sense of pride rather than despair.
Meridian Waste Solutions is not what I would call an under the radar stock, but I would consider MRDN to be both under-recognized and undervalued in terms of both operations and enterprise value.
If MRDN was purely an emerging market play, a comparison to industry competitors may not necessarily be in order. However, with Meridian Waste Solutions having an enterprise value of roughly $102 million, revenues of over $63 million, and a positive EBITDA of $13 million, the $3.00 share price does not reflect fair value when compared to others in the industry. And, because MRDN is already producing veteran like numbers, it would be appropriate to value them accordingly.
MRDN is a vertically integrated provider of non-hazardous solid waste collection, transfer, recycling and disposal services.
- Collection: Meridian operates approximately 130+ trucks with a an average age of 2010, based in St. Louis MO and Richmond, VA marketplaces, consisting of approximately 100 residential trucks and 20 commercial trucks, 9 industrial trucks and various other trucks.
- Approximately 80% of the company’s 118,500 residential customers are municipal contract-based.
- The company has roughly 27 municipal contracts with terms of 3 to 6 years and a 97% Retention Rate.
- The Company has over 5,000 commercial customers and over 16,000 Roll Off Customer with 19% being
- Permanent and 81% being Temporary.
- Transfer Stations: Meridian currently operates 4 transfer stations
- Landfill: Meridian currently owns 3 municipal solid waste landfills. Its Bowling Green, MO location has a 265 acre landfill with an expected 22,000,000 cubic yards (“cys”) currently in process of being permitted. Its Petersburg, VA location’s landfill and transfer station has 1,500 tpd daily permit capacity. Its Lunenburg, VA landfill has 1,000 tpd daily permit capacity.
- Recycling: Meridian offers recycling with their municipal contracts and subscription customers. The same residential trucks are utilized to service the recycling routes.
On numerous occasions, I have cited the inefficiencies in how the market is valuing emerging companies. In some sectors, micro-cap stocks are being awarded significant blue sky valuation, providing multiples to stocks that are in the hundreds, not single digits. Furthermore, these multiples are being given to companies that have hardly established even a hint of securing a recurring revenue model. On the other hand, stocks like Meridian, which is both revenue producing and EBITDA positive, can't seem to grab the focus of an attention deprived market. And, because the market often fails to recognize emerging players, like MRDN, opportunities to invest in undervalued equities arise.
With MRDN establishing its growth oriented revenue model, and with positive EBITDA already a reality, the multiples being afforded to Meridian Waste Solutions appear to be grossly inadequate compared to industry peers. When comparing enterprise multiples, MRDN is awarded just a 1.6X multiple for revenue, and only a 7.8X multiple from its EBITDA performance. Compared to industry veterans like Waste Management, Waste Connections, and U.S. Ecology, the multiples are highly inconsistent.
Waste Management (NYSE: WM), with its $70 share price, earns a revenue multiple of 3X and an EBITDA multiple of 10.9X. Waste Connections (NYSE: WCN), with its $80 share price, sports a revenue multiple of 6.2X, along with an EBITDA multiple of 19.5X. U.S. Ecology (Nasdaq: ECOL), with a $52 share price, enjoys a revenue multiple of 2.9X and an EBITDA multiple of 12.2X. Thus, in comparison to three of the larger and more mature market players, MRDN is being inexcusably mispriced, with almost 50% of industry wide average multiples being scalped from current MRDN values, despite the aggressive growth path of the company.
To hit closer to home, compare a company more similar in size to MRDN, Advanced Disposal Services (Nasdaq: ADSW) has a $22 share price for a $4 billion enterprise value. ADSW is granted a revenue multiple of 3X and an EBITDA multiple of 10.8X. The difference simply lacks rationale.
In evaluating comparables from publicly traded waste service companies, the average multiple on revenue is 3.1X, and the average multiple for EBITAA is 12.4X - I'm not just throwing arbitrary numbers at investors, these averages are accurate and the facts show that the valuation for MRDN is not efficient. When additional metrics are thrown into the equation, like MRDN's small outstanding share count of roughly 6.9 million, and their debt of just $81 million, the case that MRDN is undervalued is further magnified.
Trust, But Verify: MRDN Is A Legitimate Player
Many companies are pitched to investors, and while a great number of them hold potential, few in the emerging company space can offer even a small subset of what MRDN already delivers.
MRDN currently operates in St. Louis, Missouri and Richmond, Virginia, servicing over 118,000 residential, commercial, industrial, and government customers. the company is supported by a fleet of commercial, residential, and roll off trucks, with additional foundation platforms including four transfer stations, one recycling facility, and three municipal solid waste landfills.
Annual revenue is growing, currently at an annual run-rate of $63 million, with a corresponding 27% gross margin. The current and projected run rate is expected to deliver $13 million annual adjusted EBITDA, a number that was highlighted earlier. The $13 million, while technically a projection based on current revenue postings, is far more than a pro-forma model of what things "might" look like if all goes well in the future. Because MRDN already has a reliable recurring revenue model in place, management has the ability provide accurate revenue and expense visibility based on proven historical markers.
Organic growth is expected to continue at a 10% pace per year, and to compound that growth, MRDN is in active pursuit for accretive acquisitions, several of which the company has already publicly discussed. Management expects to bolt on tuck-in acquisitions and geographical expansion acquisitions to have a national footprint, and deliver improved profitability. Once accomplished, the market may find current valuations hard to ignore, providing MRDN an equitable valuation more reflective of industry norms.
The debt of $80 million, obtained at 9% through its Goldman Sachs Specialty Lending Agreement, may be considered a headwind for some investors. However, in an industry that leverages debt to build operations, this debt is being well managed and is not expected to interfere with any growth or acquisition initiatives. With just 6.9 million shares outstanding, MRDN has plenty of arrows in their quiver to attract funding on competitive terms. Insiders are putting capital at work as well, another signal to instill investor confidence, with Chairman and CEO Jeff Cosman recently investing $1.25 million into the company.
Couple the solid financial performance with proof that MRDN management is continuing to build the operations side of the business, and you have a solid case for Meridian Waste solutions's continued growth. On February 16th, for instance, MRDN announced that they have completed the planned acquisition of The CFS Group, an accretive deal that will increase services to over 30,000 commercial, industrial, and residential customers in the Richmond, Virginia market. The completed transaction marks the company's first solid waste acquisition outside of the state of Missouri, and creates a vertically integrated market for the company within the Commonwealth of Virginia.
As part of this synergistic deal, the immediate benefit to MRDN delivers revenue generated by CFS of approximately $25 million, along with the addition of over 100 CFS employees who will join the Meridian Waste solutions team, with normal operations expected to be continued in each of the current respective markets. The CFS acquisition will be immediately accretive, with Meridian Waste Solutions expected to increase its annual run rate to over $58 million in combined revenues. The acquisition was financed with $34.1 million of additional capital provided by current senior lenders, as well as funds generated from a recently completed equity offering.
Additional growth was fueled back in January of 2017, when MRDN was awarded contracts for residential solid waste collection in districts within St. Louis County, Missouri. The new contracts expand the company's hometown marketplace footprint by adding approximately 20,000 residential customers to the existing company client base, permitting the company to now serve over 65,000 residential and commercial customers in those markets.
The growth initiatives have been successful in driving service revenue to a base of over 118,500 residential customers and over 5,000 commercial customers, with additional traction expected through acquisition and organic growth. The growth and acquisition strategy will be adequately funded, utilizing an $89.1 million financing facility lead by Goldman Sachs Specialty Lending Group.
Launch of Meridian Innovations Subsidiary
MRDN is seeking to capitalize on value of recovered materials.
- Enormous volumes of manufacturing residues are disposed of on a daily basis
- Contain concentrated sources of otherwise valuable materials that could yield superior economic value
- Investing in advanced byproduct recovery technologies
- Acquiring certain downstream production assets
- Identified a technical development team of experts who have a highly successful technology development and commercialization history
- Over the past ten years, these technologists have invented and commercialized technologies that are currently generating more than $500 million per year in net income
- Through the recovery of materials from otherwise low value industrial byproduct streams
No Wasted Management at MRDN
Management at MRDN is strong, bringing well experienced executive talent to facilitate the aggressive, but manageable, growth strategy. The company is lead by Chairman and CEO Jeff Cosman, who brings over ten years of industry experience to the team. Mr. Cosman played an active role during the consolidation of Republic Services, specifically in the accounting consolidation, initial cultural integration and the reporting to Wall Street when they acquired 168 companies in 30 months, going from $500 million in revenue to over $2.1 Billion. Jeff lived and learned the waste management business from his father Jim, who spent 27 years as an Executive at Browning-Ferris (BFI) and President and COO of Republic Services.
Wally Hall, President and COO, was one of the three founders of Advanced Disposal Services, Inc., which is now the fourth largest solid waste company in the U.S. Mr. Hall was responsible for helping Advanced Disposal Services grow from just two trucks into an operation that grossed over $1.3 billion in annual revenue, employed 5300 workers, and built an enormous waste based infrastructure to manage the business operations from office to landfill. He was instrumental in successfully merging three waste industry companies, Advanced Disposal Services, Veolia, and Interstate Waste.
Driving The Growth
With experienced and driven management in place, the question then becomes, how far and how fast can MRDN grow? In 2016, growth was primarily facilitated through two acquisitions made in 2015, and also from the continued organic growth in MRDN itself. Leveraging off of the prospering revenue growth, management plans to increase the rate of future expansion by increasing the company's presence in the commercial and roll off business. With gross profit improving, despite the pace of acquisition, it exemplifies the fact that management has the ability to effectively manage and improve efficiencies while at the same time increasing scale at an accelerated pace.
Developing a well thought out business plan is the key to operational success, and the tangibles are in place for MRDN to take advantage of the strategic opportunities that are both in place and available to the company. Acquisition will be a preferred strategy of management, and their goal is to identify and act upon current opportunities to not only build greater efficiencies within the Meridian Waste Solutions platform, but to also build a strong culture within MRDN, intending to take advantage of the team's expertise in the industry. While searching for opportunities, management expects to remain nimble in its pursuit to add value at the municipal contract level, looking to constantly take measures to extend the length of existing contracted revenue.
On its acquisition mission, MRDN will focus on tuck-in operations centered around existing operations. New markets must be able to be vertically integrated or be disposal neutral markets, and the primary acquisition target will be focused on mid-sized companies with a substantial record of long term contracts with municipalities across MRDN's regional platform. The retention rate of current contracts is vital to the evaluation and consideration of any acquisition candidate. Foremost, the revenues must be accretive to MRDN earnings.
Playing Favorites With Waste
The waste industry is tightly knit, and in certain regions of the country, the businesses are comparably small in nature with family ownership at stake. Trust is a huge driver in companies having the ability to acquire others in the industry. Of significant benefit to MRDN, their name is well respected. Taking advantage of their favorable industry reputation, MRDN can close deals by offering valuable upfront consideration to owner operators, providing upfront cash, initial stock positions, and long term employment contracts. MRDN management believes that sellers are attracted to MRDN because of their local appeal, the commitment to retain current employees, customer focus, and the maintaining of local management to facilitate daily operations.
No Waste In The Industry
For investors, no matter the opportunity, investing into a long term proposition is vital. The waste industry is currently estimated to be an $89 billion basic service industry. Compounding that number higher is the approximate $49 billion annual contribution from domestic waste collection and disposal. Regardless of the economy, the business model is recession resistant and has strong and predictable cash flows, which generate respectable and healthy EBITDA margins of between 20% - 60% for sectors in hauling, transfer station operations, and landfill services.
Putting the pieces together, MRDN is in a position to quickly capitalize from both its organic and acquisitive strategies. With the most recent acquisition resulting in an annual revenue run rate of $63 million, an increase in EBIDTA is certainly expected.
MRDN can further capitalize on their efficiencies through technology and route optimization, providing high levels of customer satisfaction, which corresponds to a high degree of customer retention. Focusing on full service and scalable business platforms, and building upon its growing trend of municipal based solid waste and disposal trends, MRDN is well positioned to capitalize on several industry fronts.
MRDN, as a whole, is well integrated and has an executive team capable of taking advantage of immediate opportunity, having the ability and experience to maintain stable pricing models, build efficient and manageable collection routes, and to face down inherent risks in the industry, such as government regulation and competitive pricing pressures.
With the leadership from the executive team, MRDN has a substantial opportunity to become a powerful regional player in the waste sector. The current value proposition alone suggests investment consideration be given by aggressive value investors. But, when valuation metrics are combined with the strength of management and the availability of substantial funding’s through Goldman Sachs Specialty Lending, the potential for MRDN to ultimately be recognized and valued appropriately, with even an "average" industry multiple, may provide shareholders significant upside potential.
For MRDN, having more waste is beneficial to shareholders. And, with the most recent acquisitions demonstrating the teams ability to drive accretive revenue with efficient margins, the opportunity for shareholders to eventually be full of garbage, and profit, is not a consideration to be thrown away.