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Covanta 3Q20 results and strategic review ?4
Covanta's conference call has just concluded.
Sam Zell is clearly unhappy with the stock price, and looking at spinning off or selling the majority of U.S. assets, though there was no discussion of how that could change with a new stateside regulatory regime. One analyst questioned the impact on cash flow from this, and Zell said he doesn't know. I highly doubt that reducing integration and/or scale could improve that, but sales would improve the company's debt leverage. To the extent that American policy remains unstable, unpredictable and not environmentally sensible, this strategy makes sense.
Again, the concern is how well shareholders will be taken care of. Although the new CEO is compensated solely in stock rights, and acknowledges that he is only here for the restructuring, there are all sorts of ways in which we can be cheated. Ultimately it comes down to trust in management, and I see that as less certain than under Jones.
I also don't believe we can rely on much that management says publicly, and that virtually everything Zell says is a PR risk. That said, new management does sounds knowledgeable and competent, and it was already scrambling to cover questions and restate Zell's answers. Fortunately, it seems like he is unlikely to be on future calls. Again, in my opinion, the real strategy here is to separate the European business from the American one, so that development partners (like Macquarie) can be brought in, as I've anticipated all along.
Fundamentally, there is still some ground to be made up from the pandemic hit, particularly in Profiled Waste, which has an out-sized effect on earnings. Global energy prices aren't going to help the business model either, and planning for more local manufacturing of all sorts will probably have to precede details like waste management. Substantial recovery is clear, though, and I think Covanta is definitely worth holding, but not necessarily buying, even at currently increased prices above $8, while we wait on the election and then more detailed strategy from management.
Covanta has published its third quarter results:
- 4 cents of EPS beats by 6 cents
- from $491M of revenue, which beats by $25M
The CFO commented that the core waste business has rebounded to near pre-pandemic levels and that U.K. development is on schedule. Though CVA is back up 7% after hours, above $8, I am reacting cautiously...
The company also announced a "broad ranging" strategic review that will be "completed in due course" as the CEO steps down, and is replaced by Director Michael Ranger. Another Director, Owen Michaelson, is taking the new role of President, Covanta Europe, and Derek Veenhof will lead the core domestic waste-to-energy business as COO. Although this probably signals an eventual split of the European business and the M&A I've been looking for, I don't regard it as entirely positive, since I think Jones did a very good job running the company. The lack of comment from him is also somewhat troubling. The Chairmain of the Board, Sam Zell, is best known as an investor who wouldn't necessarily take care of ordinary shareholders in any transaction to come.
The conference call is at 8:30am tomorrow, and I will certainly comment further after that.