On May 7, The Wall Street Transcript interviewed J. Michael Horwitz, a Partner and Senior Research Analyst managing the clean technology research practice at Pacific Growth Equities, LLC. Key excerpts, including his sector pick, follow:
TWST: What are you telling investors to do at this point?
Mr. Horwitz: We certainly have our favorite names. I'm a little bit more measured within solar as it stands right now. My favorite name is probably Covanta (NYSE:CVA), which is outside of solar and is not widely followed. It has a $3 billion plus market cap in the waste-to-energy area, and they operate waste-to-energy plants across the United States. They have 31 of the 89 that exist in the United States. What's interesting about Covanta is that they were able to do a couple of billion-dollar recapitalizations of their balance sheet, and now they're focused on growing outside of the US. That's where the majority of growth is. So they have a new partner in China, and I expect to hear a lot of growth plans and opportunities in China that will continue to help the stock. Moreover, they are looking at some things in the UK and Italy. So this is a great company that already has tremendous cash flows and earnings that's about to embark on some pretty fantastic growth opportunities, especially in China. I think the stock is getting ready to have another run.
TWST: What's it going to take to get investors to pay more attention to Covanta?
Mr. Horwitz: Everybody is looking for growth in this company. When we initiated coverage at $10 about a year and a half ago, that was the same conversation I was having with people, and the stock is $24. A lot of the smart money is there. There is a whole host of investors waiting to see them articulate their growth strategy a little bit more or to actually see them win one of those bids to go out and start building projects in China or make an acquisition or establish a joint venture in the UK. My argument to investors is by the time that that announcement comes or you see it right in front of you, the stock will have moved as well. So you need to anticipate that that news is coming. I'm quite confident that that news is coming, so that's what gets the stock going, and it will trade higher right into those kinds of news releases.
TWST: So that's on the horizon sooner rather than later.
Mr. Horwitz: That's definitely a 2007 time frame. They established their Chinese joint venture partner in the first quarter, so I expect to hear some projects and new opportunities with that partner this year.
TWST: What's the risk with Covanta at this time?
Mr. Horwitz: You're definitely going to have to mark time here. These projects take a long time to get in place, so you don't just build one of these things in a couple of months. It takes a while. The numbers won't affect them economically for a couple of years. The other risk is that these guys have to operate their plants at 90% plus utilization in order to keep their margins up. So they need to continue to operate the plants and keep maintenance costs down, so that they can continue to produce the kind of cash flow that investors have become accustomed to seeing over the last 18 months.
CVA 1-yr chart