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SmartMoney.com
Trash Talking
Monday July 14, 4:37 pm ET
By Jack Hough


The Rationale
Do you scare easily? If so, don't see Fox's horror flick "28 Days Later" unless you bring a ventilator and a change of clothes.
With scary movies, at least, you can rely on warnings from other people. But what about scary stocks? After all, watching volatile shares whipsaw your retirement nest egg can be as unsettling as a confrontation with blood-hungry undead.

Fortunately, defensive investors can gauge a stock's fright potential by looking at its beta. Beta measures a stock's volatility relative to an index, usually the Standard & Poor's 500. So a stock with a beta of 1.6 would amplify market movements in either direction by 60%, while one with a beta of 0.8 would move 20% less than the index.

While useful, the measure isn't perfect because it's based on historical volatility, so it doesn't tell you what's going to happen tomorrow. Unexpected events such as plant strikes, fires and bad weather care nothing about a company's beta. That's one big reason why volatility shouldn't be thought of as synonymous with risk. Also, low-beta stocks are great when the market tanks, since they tend to drop less than the broader averages. But there's a tradeoff: These stocks also miss some of the upside during a rally.

That said, we like to use beta from time to time in conjunction with several financial measures to find so-called foxhole stocks, those that conservative investors can turn to if they think the market has gotten ahead of itself. If the S&P 500's 15% run-up in the past three months makes you one such investor, read on.

The Recipe
We used our stock-screening tool to pare down our 8,300-stock database to just those with betas of 0.5 or less. We then looked for one-year growth of at least 15% in both sales and earnings, and positive stock returns over the rough-and-tumble past three years. Also, we required that each company's earnings-growth rate exceeds its price/earnings multiple, a sign of growth on the cheap. For details on all of our criteria, take a look at the recipe on the top right of this page. We ended up with a list of 24 names.

The Results
"The company employs a customer service, dispatch and routing platform that is Windows based and is both comprehensive and user-friendly, allowing for rapid changes to accommodate our ever-changing customer needs."

You might attribute the above quote to your bank or brokerage firm, but your garbage man? It comes, in fact, from the Web site of Folsom, Calif-based Waste Connections (NYSEWCNNews), which has 90 collection operations, 29 transfer stations, 31 landfills and 18 recycling facilities. Founded in 1997, the company now operates in 22 western states with a focus on suburban and rural areas with high population growth rates.

If you doubt that one man's trash is another man's treasure, take a look at these five-year revenue and operating income numbers:


Most of that growth has been funded by acquisitions, and several more are planned for the near future. In 2003 the company will pay a total of $100 million for properties generating $60 million in annual revenues. Most of the money will come from free-cash flow, estimated at $70 million to $75 million for the year. Management points out that less than 5% of 2003 earnings will come from new sources, compared with past years when a majority of earnings depended on acquisitions.

Waste Connections believes its acquisition program will be self-funded by 2004. And analysts say the company is getting a good deal on the purchases; it buys most competitors at an EV/Ebitda multiple of between 5.5 and 6.5, down from an industry average of 10.0 to 12.0 in the late 1990s. (EV/Ebitda, a key buyout multiple, stands for enterprise value over earnings before interest, taxes, depreciation and amortization. Click here for more details.)

All this buying has produced a debt/capitalization ratio of about 0.54, a more-than-manageable figure, but not one that we'd like to see move much higher. Fortunately, it seems more likely to fall. Aside from the company soon clearing the hump in terms of funding buys from its own cash flow, it also has a $150 million convertible bond likely to be swapped for shares in April 2004. The move shouldn't dilute earnings, as the conversion potential is already figured into forecasts, but according to most analysts, it would drop the debt/capitalization ratio to around 0.40.

Waste Connection's first-quarter results, reported April 22, showed earnings per share rising 14% year-over-year to 49 cents, beating Reuters Research's consensus by a penny, while revenues rose 21.5% to $128.5 million. Not bad, considering first-quarter challenges included ugly weather, a lack of acquisition contributions and tough prior-year comparisons.

Shares trade now at 15.5 times Reuters Research's 2003 earnings consensus of $2.27, compared with a P/E of 22.2 for the waste-management industry. And the company is expected to increase earnings at 17% annually over the next five years, compared with 14% for peers. That's good for a price/earnings-growth, or PEG, ratio of 0.91, lower than both the group and the S&P 500, each at 1.59.

Waste Connection's beta of 0.17 indicates a near zero correlation with the broader market, thanks to the stability of the trash business. That lack of correlation is evident in shares' 99.6% gain over the past three years, during which the S&P 500 fell 33.5%.