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Route Efficiencies and Landfills Help Waste Connections Dig a Wide Moat

This waste and recycling service provider enjoys enviable competitive positioning.

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After reviewing  Waste Connections' (WCN) competitive positioning, we are upgrading our economic moat rating to wide from narrow. The 2016 Progressive Waste merger added material goodwill to the balance sheet, pushing capital returns below the firm's historical run rate. Nonetheless, its myriad tuck-in deals have added value, and management is swiftly improving Progressive Waste's profitability. Further, like  Waste Management (WM) and  Republic Services (RSG), Waste Connections' traditional solid waste operations enjoy robust competitive advantages rooted in intangible assets (regulatory permits) and cost advantage (route density), with the added benefit of focusing on less competitive secondary markets.

Regulatory permits create enormous structural barriers to entry for the firm's disposal operations, thus producing a strong intangible asset. Developing and operating a landfill requires a host of permits and federal and local government approvals (zoning, environmental protection) that are costly and challenging to secure. On top of that, "not in my backyard" opposition often generates formidable roadblocks to constructing new landfills as well. Waste Connections has also built meaningful cost advantages stemming from superior local route density relative to small waste haulers, most of which aren't vertically integrated. Scale matters in route-based businesses because it bestows greater utilization and leverage over a vast fixed-cost base.

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Matthew Young does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.