Casella Waste Systems has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 15.2% and now trades at $113.18. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Casella Waste Systems, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Despite the momentum, we're sitting this one out for now. Here are three reasons why you should be careful with CWST and a stock we'd rather own.

Why Is Casella Waste Systems Not Exciting?

Starting with the founder picking up garbage with a pickup truck he purchased using savings from high school, Casella (NASDAQ: CWST) offers waste management services for businesses, residents, and the government.

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 3.5% 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. EPS Barely Growing

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Casella Waste Systems’s EPS grew at a weak 1.2% compounded annual growth rate over the last five years, lower than its 15.9% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Casella Waste Systems’s ROIC decreased by 4.7 percentage points annually over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Casella Waste Systems isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 111.9× forward price-to-earnings (or $113.18 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.

Stocks We Would Buy Instead of Casella Waste Systems

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