The slowdown in Europe and ongoing threat of crisis have translated into discounted valuations for several European-based companies. The resulting investment landscape also offers historically high yielding stocks. The combination of discounted stock prices and high yields presents a compelling opportunity to investors who believe the current onset of international financial tumult is surmountable. We believe Veolia, in these conditions, is worth considering.
Veolia Environnement (VE)
52Wk Range: $10.12-26.31
The Story: French utility giant Veolia is the ultimate high risk, high reward play. A lot of things have been going very wrong at Veolia over the last several years. The company's track record of aggressive expansion through acquisition has left it with a significant debt load, which spells disaster in the Eurozone. The problems have been compounded by somewhat messy internal politics, which we explored in more depth in March in an article mapping, at the time, Veolia's recent breakout resulting from the intended sale of assets. The stock jumped from $12 to $16 in a short period. But since that time, things have gone back the other way for Veolia, culminating in a downgrade last week by UBS AG from "neutral" to "sell." The downgrade follows a mixed bag of recent analyst activity for Veolia. HSBC and Nomura upgraded the stock in April, while ING initiated coverage at "sell" in June.
The downgrade last week and further tumult in Europe have beaten the stock down to near-lows again, and we think it might be time for brave investors to pull the trigger on a long position. Veolia has a lot of assets around the world that can help boost shareholder return. We expect to see further restructuring and cashing in of these assets - and a concerted effort at debt reduction. Plus, we really like water as a long-term investment - and Veolia is a global water leader.
We own Veolia ourselves, having bought it around $12 in February, but we are cautious of initiating further positions at this juncture given the preponderance of uncertainty surrounding the company's asset sales, internal politics, and the macro conditions in Europe. We believe the upside is substantial - and Veolia's 35% gain in fifteen days in March reflects as much - but despite our ownership and the compelling valuation, we urge a "wait and see approach" in the short-term.
The Numbers: Veolia has a forward P/E of 8.8 and a dividend that was recently slashed but still sizable (over 6% projected). The company trades well below its book value, but cash flow is a problem and the company had over $18 billion in debt at the end of 2011.
Notable Alternatives: Veolia is relatively unique in its reach and global positioning, but we believe its forced asset sales will benefit several utility/environmental services-type companies it will no longer be competing with. Despite recent earnings disappointment, we like Republic Services (RSG) as a long-term play on the growth of waste management. So too do we like Waste Management (WM) and its outsized yield. Still, we see more opportunity for growth and investor return in Republic. Since Veolia is withdrawing its U.S. operations, these two companies stand to benefit, as do smaller dividend plays like Progressive Waste Solutions (BIN), Waste Connections (WCN) North, Aqua America Inc (WTR), and American Water Works Company (AWK).
One non-dividend play that we also like in this space is Clean Harbors (CLH), which has a forward P/E of 19 but trades in the middle-lower portion of its 52-week range and has shown impressive revenue and earnings growth recently.