Covanta: Waste Yield

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by Debra Fiakas CFA

Last week Covanta, Holding Corp. (CVA:  NYSE) announced the pricing of a note offering.  The waste disposal and waste-to-energy company raised $400 million in the deal.  The new capital will make it possible for Covanta to repay some older debt when enough to spare for future expansion capital.  Covanta’s business model of using the municipal waste it collects for electricity generation is capital intensive.  What is more management has shown a penchant for acquisitions.  Just two months ago Covanta acquired two waste transfer stations from a competitor.

Covanta appears to be making good on its investments.  The company earned $45 million in net income on $2.3 billion in total sales in the most recently reported twelve months.  The company boasts a 2.1% return on assets.  That is not quite up to the average of the waste management industry, but Covanta can be given a bit of consideration.  The company converted 19.4% of its sales to operating cash flow.  For a company perpetually in need of investment capital, strong cash flows are vital.

Strong cash flows are also vital for Covanta’s dividend.  The company has raised its payout twice since initiating the dividend in March 2011.  The current yield is 3.7%, putting Covanta among the few small-cap companies in our Beach Boys Index of biofuel companies to pay a dividend.  The stock trades at 36.1 times the 2014 consensus earnings estimate, making it one of the most expensive as well.

A review of recent trading patterns suggests CVA is overbought at the current price level.  The stock has been on the rise since the beginning of February, largely in response to bullish chatter encouraged by the note offering.  Anyone considering long positions in CVA might watch for periods of trading weakness to accumulate shares.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Image: Abengoa’s PS20 and PS10 in Andalusia, Spain . Photo by Koza1983.


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