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Covanta 1Q17 results ?3

10:05 26-Apr-17

The Covanta conference call has just concluded  A little more color was given on the first quarter outages.  Almost half of the $23M revenue impact was from Fairfax.  Again, outages were used to perform maintenance ahead of the original schedule.  So, after insurance, total impact from the downtime is $5M for the year, which was already included in guidance.

To my mind, metals were the most interesting part of the call.  That segment nearly doubled, not only from increased metal prices but due to the company's processing advances.  As a result, management expects metals to be significant contributor in coming quarters despite the pullback in prices.  In particular, the advance of non-ferrous in Fairless Hills should further improve the results of this segment and other locations for similar operations are still being examined.  It's also worth noting that medical waste, though still a very small part of the business, grew around 15% the last two years and should continue to grow at a double-digit percentage.  The only weakness lies in the energy segment, where management aggressively hedged 2017 power prices, and made progress in getting to the same level of exposure for 2018, in a currently tough pricing environment. 

On the international front, Dublin is still on track, and began receiving waste.  Management is eying new projects in the UK, and consulting on a Manila project, in the Philippines.  Developed nations will tend to be a larger part of any expansion, due to higher energy and waste disposal costs.

That leads us back to the company's core business and the market reaction.  Covanta is seeing firm prices for waste processing.  This has already allowed management to raise the organic growth outlook by $5M to $30M for 2017.  Thus, despite what you hear from some analysts, a shift toward shorter-term contracts are good as disposal markets tighten in the NE.  Management is currently negotiating contract renewals Delaware county, Lancaster, and Harrisburg in this environment.

Covanta has released its results for the first quarter:

• the company posted an EPS loss of 37 cents, which misses by 17 cents
  
• on revenue of $404M, which beats by $3M
• management also affirms full year guidance, saying:

The fire and resulting downtime at the Fairfax facility impacted results in the first quarter, but recovery is well underway, with credit to our outstanding team on the ground.  We expect to recoup much of the financial impact later in the year as we receive insurance payments.  We also took the opportunity to accelerate scheduled outages at a few facilities into the first quarter while these facilities were down for other reasons, which contributed to our completing about 35% of our annual planned maintenance expense in Q1.  We are very well positioned to post improved year-over-year performance for the balance of the year, and remain squarely on track with our full year outlook.

Despite that, waste processing showed about 2% organic revenue growth.  Energy revenue fell slightly while Metals increased commensurately.  The latter is not likely to continue, based on what's been going on in the commodities markets. 

It's been a bit of a wild ride for CVA lately, with shares showing notable weakness in an otherwise exuberant market.  Nonetheless, it seems to me that the dividend will be maintained and I still see shares as a bargain at $15, though we'll have at least the rest of the year to wait for any dividend growth.  The conference call is tomorrow morning and I will report again if there is anything interesting.

Esekla

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All content is the opinion of the author, rather than investment advice.
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