Covanta Holding Corporation (CVA) is a company that provides waste management and energy services in the Americas, Europe and Asia. It recently reported third quarter revenue of $431.7 million, up from $411.5 million in the second quarter 2011. Amongst hedge funds, Martin Whitman’s Third Avenue Management is a fan, as is Eliav Assouline and Marc Andersen’s Axial Capital and David Gallo’s Valinor Management Llc. CVA recently traded at $14.20 a share. Analysts expect the stock will reach $19.60 within the next 12 months. CVA also offers a dividend yield of 2.10%, or $0.30 a share. The combination has prompted several analysts to recommend the stock as a buy or better, but that doesn’t mean there aren’t better companies for the price, even within the same industry. To get a better idea whether CVA is a good buy, let’s look at the company in closer detail, as well as several of its closest competitors – Waste Management (WM), Republic Services (RSG), Darling International (DAR), Clean Harbors Inc (CLH), Waste Connections (WCN) and Stericycle Inc (SRCL).
First, we will look at the P/E ratio. This metric divides a company’s share price by its earnings per share – the lower the number, the better. P/E ratio indicates how many times earnings a company is trading at. If the P/E ratio is high, the stock could be overpriced, so the lower the better. Of the companies we looked at, DAR has the lowest forward P/E at 8.56. WM has a PE ratio of 15.4, followed by RSG’s 19.4. WCN has the next lowest at 19.7, followed by CVA at 23.6, CLH at 23.7 and SRCL at 25.2.
We used beta as a measure of risk. A beta of 1.0 means that the stock moves with the market. The higher a stock’s beta, generally, the more volatile the stock, and, as a result, the more risky. A lower beta tends to indicate that the stock moves more independently from the market. At 0.29, SRCL has the lowest beta of the group. CLH is next at 0.48, followed by WCN at 0.55 and CVA at 0.59. WM has a beta of 0.63 and RSG has a beta of 0.68. DAR had the highest of the set at 1.76.
Next, let’s look at the earnings growth consistency and expectations. Expected growth estimates can be wrong. In fact, they are frequently overstated, but they can be useful when comparing companies or comparing a company’s performance relative to its industry. CVA’s earnings shrank -5.6% over the last five years, a strong performance compared with its industry, which fell -22.4% in the same period. CVA’s earnings are expected to grow 10% over the next five years while its industry is forecasted to grow 14.5%. Industry giants WM and RSG are expected to grow at a 10% rate as well. Over the last five years CLH’s earnings have grown an impressive 33% and are expected to grow 15% over the next five. DAR grew 33.5% over the last five years. Estimates for its earnings growth over the next five years were not available. Its year-over-year growth estimate is just 5% for next year. WCN’s earnings went up 11.9% over the last five years. Information about its earnings growth over the next five years was not available. Its year-over-year growth estimate is 12.92% for next year. SRCL has very consistent earnings growth. It grew 19.3% over the last five years and is expected to by 17.5% over the next five.
HEDGE FUND OWNERSHIP
Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on the average. Of the companies we looked at, CVA was the most popular. Of the 300+ hedge funds we track, 20 had positions in CVA at the end of the second quarter. Eighteen hedge funds had RSG in their portfolio. DAR was next at 15, followed by SRCL at 14, CLH at 12, WM at 10 and WCN at 8.
THE BOTTOM LINE
We like WM the most because of its 4.3% dividend yield and 10% expected growth rate. The stock isn’t cheap relative to the market but not expensive either. CLH and SRCL are expected to grow at much higher rates but have high PE ratios and there are better opportunities in the stock market. Apple (AAPL) has a higher expected growth rate than these two stocks but trades at a much cheaper multiple.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.