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CWST Uses Aggressive Accounting to Understate Liabilities and Expenses
• CWST appears to overestimate its landfill expansion airspace, as evidenced by nearconstant write-downs of expansion airspace for non-unique reasons. This likely overcapitalizes costs and creates a false representation of the remaining life of landfills.
• CWST discounts its landfill asset retirement obligations using a 9% discount rate, which is almost double that of comps. We believe that a more accurate discount rate would be
5.5%, or its marginal cost of capital today.
• EBIT will decline 15% upon full adoption of the new lease accounting standard for CWST’s landfill operating lease contracts.
• Adjusting for the above, we believe that CWST’s 6% EBIT margin should decline significantly and landfill PP&E assets should be written down by several $10s of millions.
• CWST’s adjusted book value is deeply negative, and adjusted EBIT significantly lower than reported EBIT. In the long-run, we believe that CWST is an inherently uneconomical business.
• A long-standing audit partner associated with multiple frauds and an entrenched and inexperienced audit committee will likely fail to spot these financial deficiencies.
