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Covanta & Westport business updates -5

18:52 14-Apr-20


Covanta has provided a business update.  The dividend has been cut by two thirds, to 8 cents per quarter and 2020 guidance is pulled.  The CEO is cutting his pay in half and all other execs are taking a 25% pay cut.  Board compensation is lowered by 60%.  Construction on Newhurst and Rookery is considered essential and thus is continuing, but Earls Gate, in Scotland, is halted.  The dividend cut should save $90M per year and another $15-30M in cost cuts is slated, which should allow the U.K. projects and TAPS to proceed.  All facilities are operating with "minimal disruption" providing essential service, and 3 of them are permitted to accept Regulated Medical Waste and have begun receiving COVID-19 infected material.

My sense is that the market was pricing in a 50% dividend cut.  If so, CVA shares trading back down to or below the $7.50 strike is to be expected.  Unlike some other sectors, the business is exactly the sort of thing one generally wants to own in this environment.  Thus I would see $5 as the lower limit of immediate volatility and be willing to make opportunistic purchases at or below that level.

By contrast, the Westport update was review of the global situation.  Italy & India are shutdown until (at least) May 3rd.  Other regions are operating with staggered shifts and other "smart work" adjustments.  To its credit, management acknowledges that impact will extend into the second half.  It also notes that pollution indexes show positive effect from shutdowns and there was vague talk about societal change, but that would rely on active government, and we know where such hopes get us.  What we can count on is a 20% wage cut for all Canadian employees.  Italians are furloughed with government support, while the board & execs are deferring bonuses & salary.  In short, though Westport will make it through this year, the situation is critical and shares deserve to be below $1, possibly finding new lows, until there is some more definitive end in sight.