For every action, there is a reaction, and every invention creates garbage. Ever wondered how trash is dealt with? Here are three companies engaged in waste management and recycling. Two are based out of the US. One is limited to the domestic market, Republic Services, Inc. (NYSE:RSG), and another has an international profile, Covanta Holding Corp (NYSE:CVA). The third is based out of France and is present in the international market, Veolia Environnement SA (ADR) (NYSE:VE). The question remains, are they making or wasting profits?
Garbage collection, water treatment, and waste-to-energy
Short-term attention is directed to customer diversification. Management sees a long-term growing risk to the model if contracts are limited to government agencies. In line with that, future contracts will look to develop partnerships in the industrial sector as a consultant and project developer. Contracts with government agencies, however, continue, and $400 million for a desalination plant was signed recently in Saudi Arabia.
Financially, Veolia Environnement SA (ADR) (NYSE:VE) is in need of a push. Revenues and free cash flow have entered a small downtrend during the last decade. On the good side, debt has been reduced and total cash flow increased, while net income remained stable in the same period. Finally, operating income stayed on the positive but is well below the industry average.
Veolia Environnement SA (ADR) (NYSE:VE) is trading around the midpoint of its 52-week range, at $11.17, and is expected to drop another dollar. Yield stands at 6.95% on a dividend of $0.75. In all, the stock is well-priced and I recommend buying. Projects in St. Louis and Saudi Arabia will give the company a short-term push, and a business-model focus on private partnerships will provide the long-term outlook for lasting success.
Garbage collection and waste-to-energy
Covanta Holding Corp (NYSE:CVA) is the world’s largest waste management company. With operations in North America and Europe, the business turned toward the generation of clean energy – so clean in fact, the firm has been the recipient for many awards. Shareholders were also rewarded through the last decade.
The short term is occupied by temporary contracts that amount to 25% of total revenue. On the other side, 75% of future revenue is guaranteed by long-term contracts. Having mostly exhausted domestic opportunities, the company opened activities to China and Italy. Further projects in England, Scotland, and Ireland may be delayed due to economic constraints, but government regulation prefers incinerators to landfills.
Debt is high, but stable, and backed by stable cash flow and net income. Revenues continue to grow, and operating margin recovered in the last two years, regaining six out of 11 points lost. A soon-expected deal with Harrisburg city officials will improve debt and revert current cash shortcomings. Finally, Chinese authorities’ preference for local businesses offer limited expansion.
Trading at 26.2 times its earnings, just over the industry average, the stock is fairly valued. Current yield is at 3.14% at a dividend of $0.16, and the price is close to its 52-week high of $21.30. This stock is a hold for a 10-year investment until prices drop to around $18.
Garbage collection
Second to Waste Management, Inc. (NYSE:WM) in the US market, Republic Services, Inc. (NYSE:RSG) focuses on the non-hazardous solid-waste segment. The firm recently made the news after announcing a $15 billion upgrade for its Lorain County Resource Recovery Facility. After buying Allied Waste, the company improved its costs and efficiency, digging a small economic moat.
In the short term, Republic Services, Inc. (NYSE:RSG) is facing decreasing waste volumes, cutting revenues short. For the long term, the firm needs to invest in technology to avoid been shorthanded by landfill alternatives, and complete asset upgrades. Additionally, the company will have to live up to its tradition for rewarding green-thinking shareholders. So, if waste volumes do not recover steadily, the needed cash volume to pay dividends, complete upgrades, and innovate may not be available.
Financially, Republic Services, Inc. (NYSE:RSG) is strong. In the last decade, revenue, net income, and cash flow have been on the rise. Debt has also been on the rise, but it remains backed by a healthy cash flow. No less important is the fact that operating margin came in at the high teens for the whole period, and today is above the industry average.
Currently trading at 22.6 times its earnings – a 13% discount to the industry – the stock is undervalued. A 2.78% yield at a $0.22 dividend makes for an interesting long-term investment. Price, however, is close to its 52-week high, and I recommended to hold. Keep looking for a price drop and upgrades to begin before making any investment.
Recycling
Republic Services, Inc. (NYSE:RSG) has failed to recycle materials, and failed behind the competition. At different scales, Covanta Holding Corp (NYSE:CVA) and Veolia Environnement SA (ADR) (NYSE:VE) have turned Waste Management, Inc. (NYSE:WM) into a profitable recycling business. Veolia Environnement SA (ADR) (NYSE:VE) is better positioned to benefit from European regulation, and I recommend as a buy.
Victor Selva has no position in any stocks mentioned. The Motley Fool recommends Republic Services, Veolia Environnement (NYSE:VE) (ADR), and Waste Management. The Motley Fool owns shares of Waste Management. Victor is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Making Profits From Trash originally appeared on Fool.com is written by Victor Selva.
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