Stock analysts dismiss short seller attack on GFL, but investors sell off shares amid allegations

Analysts who cover Toronto-based waste management company GFL Environmental Inc. are for the most part dismissing damning allegations laid out by a short seller targeting the company, but based on the stock price, it’s clear investors are not entirely convinced yet.

On Tuesday, New York-based short selling firm Spruce Point took aim at the company in a 107-page report, accusing the company of using dubious accounting methods to hide debt loads and accusing some of the company’s executives of being involved in suspect ventures in the past.

The short seller, who stands to profit from pushing the company’s stock price down, says the company’s shares are effectively “worthless.”

Prior to the report, just about every investment brokerage analyst who covers the company had a “buy” rating on the stock, which means they think the stock price is poised to go significantly higher in the coming year.

None of those analysts has changed their rating on the stock in the days since the report came out, and many of them are dismissing the allegations.

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Jefferies analyst Hamzah Mazari said the short seller has a “lack of industry knowledge” about the waste management business and says the company’s debt loads, revenue and capital expenditures are entirely reasonable within the standards of its peers.

The company has grown aggressively through acquisition, most recently gobbling up U.S. waste firm WCA for $1.2 billion US just last week.

GFL, which operates waste disposal fleets in eight provinces and 23 U.S. states, has made more than 100 acquisitions of other companies since being founded in 2007, and Spruce Point says those deals are loading the company down with debt.

Mazari rejects that notion.

“It may be fair to say that the company had to pay up to build their U.S. platform, but to say it is a zero because of [that] is losing the forest in the trees,” Mazari said.

He also says Spruce Point has a “lukewarm” record with previous short calls, which is why the current sell-off could represent a buying opportunity.

“The stock reaction on a name that does not have a lot of public history did not surprise us and is not concerning.” 

While about 73 million shares are available on public markets, most of the company is owned by private equity groups and pension funds, including the Ontario Teachers Pension Plan.

Mazari has a target price of $36 for the company’s Canadian shares, well above the $24 level they were changing hands at on the TSX on Thursday.

The company went public in March at just over $22 a share on the TSX in one of the largest IPO’s in Canadian history, raising more than $2 billion.

Prior to the short seller’s report, GFL shares closed on Monday worth a little over $28 a share. They then lost nine per cent of their value on Tuesday and another five per cent on Wednesday. They spent much of Thursday see-sawing.

The sell-off in the stock has already drawn the attention of a half dozen law firms that specialize in lawsuits on behalf of investors.

TD Bank analyst Tim James had a “hold” rating prior to the report, meaning he thinks the company is neither a “buy” nor a “sell,” but he has not changed his rating or his target price of $32 a share since the report surfaced.

James said while he’s not able to “validate or refute” all of Spruce Point’s allegations, he’s confident they don’t represent “material risks to the value of the company or its ability to generate shareholder value.”

“We believe that GFL is entering a period over the next 6‒18 months in which its financial results will start validating past management actions and render the more sensationalistic claims in the report irrelevant,” he said.

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