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Covanta 1Q19 results +2

09:44 26-Apr-19


The Covanta conference call has just concluded and, as I suspected, it was dominated by analyst catch up.  Specifically, now that Covanta has realized a $44M payment as primary developer for financial close on Rookery, some analyst(s) incredulous about less 3 year payback profile for the investment.  Protos should be next, though smaller, with approval next month and reach financial close in June or July.  I further note that Brexit resolution could favorably impact the currency effect.

The eastern U.S. is starting to see a waste disposal crunch.  Both tip fees and profiled waste revenue grew 9% YoY; management sees annual price increases of at least 3% as sustainable.  Furthermore, Covanta has 20% contract turnover per year on average, though there is some lumpiness, which allows for resets of long-term revenue to current pricing, which can be in the neighborhood of 25% higher.  Since contract negotiations are continually underway, Covanta management is unlikely to ever trumpet this, but it is the core thesis that I've always held, and a big deal.

The real surprise in the call was that management is now seeing interest in new U.S. projects! This is quite a turnaround from the attitude we saw at the beginning of the Trump administration.  Perhaps in light of this, the company sold small plants in Springfield and Pittsfield, MA, which were only slightly profitable, for trivial gains in order to preserve management bandwidth.  Development of new projects is a lengthy process, but if Covanta can cut a deal similar to the U.K. one, that could transform slow appreciation into explosive growth.

Though metals were unexpectedly down, TAPS is on track, and should be commissioned towards the end of the second half.  After that, Covanta should be able to resume paying down debt in 2020.

In summary, though this report really just shows execution on the factors I've been citing all along, analysts and the market are finally understanding.  Consequently, I reiterate my outlook given at the end of my 4Q17 analysis for the company, for CVA to move toward the mid twenties as we progress through the first half of the next decade.  I had already said my $16.67 price target was likely to function as more of a floor, now that such progress is closer and better understood.  With the market and analysts beginning to fully realize what is going on, I think the $17.50 strike price is likely to be a more practical pivot point.  However, macro market dangers abound, and they could easily provide some substantial buy-the-dips opportunities.

On 4/25/19 5:54 PM, Esekla wrote:

Covanta has reported earnings for its first quarter:

  • EPS of 3 cents per share beats by 21 cents
  • on $453M of revenue, which misses by $4M
  • affirms FY 2019 guidance for $132.5+/-12.5M FCF

I strongly suspect that some analysts have not adjusted for the post-GIG operational model.  As such, both the beat and miss should be ignored.  Metals revenue was weaker than I anticipated and the core business was even stronger, but mostly this looks like another solid, steady as she goes report so far.  The conference call is at 8:30 tomorrow morning, and I am likely to write again.