Covanta (CVA) is not tied to any of the instantly recognizable areas of greentech, such as solar or wind, but it still operates right in that niche. The company quite literally turns trash into treasure — or in this case, energy.
The company operates 45 facilities throughout the northeastern United States that convert garbage into steam, which is then used to power electricity at the utility level.
Having emerged from the bankruptcy of a previous incarnation in 2004, Covanta is the biggest company in its industry. Of its $1.6 billion in annual revenue, 63% comes from long-term contracts with municipalities (where it picks up trash) and another 26% is tied to energy revenues from utilities (where the steam generated from burning waste is used to create electricity). The remainder of its sales comes from a metals recycling business.
Management is currently in the midst of building out a few projects and generators, which is gaining Covanta more attention from the Street (it was initiated with a buy rating with a $23 target by an analyst at BB&T earlier this month).
CVA’s financials have improved with the project expansion, as operating cash flow in the latest quarter rose from $64 million to $102 million. The top line has been growing faster than expenses, at nearly 8% revenue growth last quarter with comparable growth expenses of a little more than 3%.
As new projects and operations come online, free cash flow could see a boost. According to management, if you exclude the working capital tied to those projects, the midpoint of its range moves to $230 million, or 10% yield. Assuming a meaningful compression of that yield, the shares are well positioned to move into the mid-$20s range. That’s in addition to a healthy 3.9% dividend yield, which puts cash in our pockets as we wait for new business streams to come online.
Plus, we’re in good company investing in Covanta. It’s no secret that I like to see noted investors with strong positions, and CVA has a heavy hitter holding a sizable stake in the company. Sam Zell, who you may be familiar with as the billionaire who built up and sold a commercial real estate empire several years ago, owns 11% of CVA stock and also serves as chairman.
With improving financials and future growth already well on its way, Covanta offers an attractive opportunity in this niche area of the greentech revolution, especially as electricity demand rises as we head into the summer months.