Chapman Matis

Chapman Matis
Contributor since: 2013
Great work digging this company up Ravi! +1 Follower!
Hey Ravi,
Always enjoy your research, thanks for a good update. I have something I'd like you to look over, considering your understanding of the current WtE environment. Here's the link
Thanks for looking into those acquisitions. It seems that the organic growth of the WtE field is pretty tepid and that the bigger players have been snapping up smaller players. After reviewing your comments, I realized that you are creating a distinction between WtE operations and Landfill Gas to Energy, which is why your estimates seemed off to me.
1) You're right, but two points to consider. First, taking your number (I didn't verify it, just taking it at face-value) 6.5% of WM's 2012 yearly revenue (13,649M USD) is already about 54% of CVA's 2012 yearly revenue of 1,644M USD. According to WM's filings, during that time, they operated 17 WtE plants. HOWEVER, they also operated 137 Landfill Gas to energy plants, which I think are excluded from your calculations and should require a reassessment of your claim that "Covanta Energy (NYSE:CVA) is the largest owner and operator of infrastructure for the conversion of Energy from Waste in USA." Looking at the 3 quarters each company has reported so far since then, WM's estimated 2013 WTE revenue (6.5% of 10,483 M= *681.395*M) grows to more than 56% of CVA's first 3 quarters' revenue of 1,213M.
Second, if your numbers are correct that WM handles 8M tons while CVA handles 18M, it is pretty troubling that WM can generate more than 56% of CVA's revenue on only 44.4% as many WtE tons processed. Drilling down further, I think we can see the benefits of a vertically integrated operator in the theoretical WtE revenue generated per ton. Covanta has done 1,213M on 18 tons, producing a theoretical WtE revenue/ton figure of 67.389. According to the above highly-superficial estimates, WM has done 681.395M on 8 tons, producing a theoretical WtE revenue/ton figure of 85.174. Now, I know you've indicated that revenue figures for CVA can be misleading, but they've actually only delivered 2 quarters of operating profit out of the 3 reported so far for 2013. I just think I'd rather have a diversified, vertically integrated, profitable 8 tons than a pure-play, horizontal, less profitable 18 tons. Although I think if CVA's next quarter shows continued growth in operating profit, I'll dive further into the numbers/scale.
2) These numbers don't really make sense. I think you're using total throughput, which does not really have much bearing on WtE levels. Also, you're excluding landfill-gas-to-energy projects that outnumber WtE plants by 120 as of FY2012 numbers, landfill gas-to-energy projects have a unique, company-specific synergy with decreasing hauling/transfer/colle... expenses that CVA just cannot capture yet.
3) Not sure of the relevance. WM's diversified revenue base makes this point somewhat moot. Even if your concerns are justified, by looking at the hypothetical WM/CVA WtE revenue/ton numbers above, one can conclude that WM is targeting a higher return on WtE than CVA. Keep in mind the massive vertical integration's effect on profitability. I still think the scalability factor favors WM. In the case of a technological breakthrough, I think WM would be able to scale faster due to the vertical integration.
4) WM does not operate in China, they do some consulting through their "Environmental Services" division, but you will not see the green WM trucks hauling/operating in China. Going back to an earlier point, the international waste services market has a ton of currency/regulation snags that can bleed profitability. CVA's Irish operations prove that. Another Irish-owned waste company, GreenStar, LLC, was purchased by none other than WM. I think if you compare the fundamentals of each company's stocks, CVA's 3.76% yield on a 174% payout ratio is less preferable than WM's 3.51% yield on 73.2% payout ratio.
In conclusion, I just do not see a reason to prefer CVA over WM...Yet...thanks for the informative article as I will now watch CVA's earnings for reads on the WtE landscape. Looking forward to your further research.
Disclosure: I'm long WM, and have written about WM here at seekingalpha, (
Good informative article about WTE, thanks for the good read!
You say:
"Growth in EfW business comes from 1) Acquisitions 2) Increasing capacity at existing facilities and 2) Bidding for new projects. Acquisitions: CVA has done quite a few acquisitions over the last 6 years. CVA has spent on average $125M/year on acquisitions accumulating 11 EfW facilities and 4 biomass facilities in the past 5 years."
I ask:
Do you know how these acquisitions are paid for? Are they stock or cash? I'm curious because it seems that 125M/year is about what WM earmarks for all types of "tuck-in" acquisitions in a year. The problem? CVA's market cap of 2.33B is about 11.6% of WM's 20.06B. Additionally, WM's on-track free cash flow target this year is about 1.2B, or 51.5% of CVA's market cap. I think that CVA is a fascinating company, but it's got all kinds of problematic international exposure in one niche, nascent industry. I'm just wondering if maybe WM is a much more diversified, cheaper, and stable way to play this, especially if you're including the recycled metal kicker. If WTE really starts accelerating due to technological and scale shifts, the upside seems baked into CVA (maybe not as much after last quarter), whereas WM could easily double-to-quadruple its WTE assets using already-earmarked funds to catch up.
CVA always is on my radar, but I've tended to be more of an observer. Your thoughts?
Looks like some kind of dead-cat bounce for PETM today...zing!
disclosure: I'm long PETM through Feb2014 call spreads. I've written about PETM on SeekingAlpha.
I think this coming quarter will provide the most realistic barometer on the current management for a few reasons I detailed in my Jan 14th article, ( First, this may be one of the tougher retail environments in recent memory, so performance in specialty retail is at a premium. Second, during the 3rd quarter call and during this year's analyst day, management indicated that preparations going into 4th quarter included massive resets in both cat and dog hard goods. Results of this reset will be seen in Q4, so I think that may be the first "true read" on the direction of the company. Third, another pillar of this management team's strategy in the resets is to replace lower margin generic and conventional food SKUs with higher margin "naturals and organics" SKUs, which they claim is more in-line with what their customers want. At any rate, the move away from mass-market conventional food SKUs is positive in my view since larger retail chains and online merchants favor their widespread availability. Fourth, the current management team has kept an opaque cloak over online sales by including it in comp sales. I think the opacity has produced a fear that the company is getting killed online. It would be nice to see PETM separate out online sales from brick & mortar sales. As part of their presentations, management estimated almost 700 million in sales "originated" from online views However, ( estimated that PETM did 39.2 million in online sales (approx 5.6% of the 700 million in-store sales generated from online visits) in 2012... even if that estimate is off, the point management seems to be making is that online sales are a natural extension of the PETM experience. As part of the resets in 3Q, management said a new dynamic online-to-store inventory system is being rolled out which should help drive online integration, including several test stores incorporating online ordering in-store through associates toting Ipads. I really think reports of PETM's impending death of growth are greatly exaggerated.
Disclosure: I am long HFC. One of the better modern interpretations of Graham's framework. Your article strikes an impressive balance between theory and practice that many Graham disciples at SA lack. I will follow in hopes of further good work! I also plan to dig deeper into RCKY. I am curious about the churn of positions in the 5 & 15 year back tests. How many stocks were added/dropped during the respective re-screenings during those intervals?
Keep Contributing!
Long WM
Their involvement in China is overstated. WM has invested with several waste-to-energy companies that operate in China. They also do the same with waste-to-energy and other "green" companies here in North America. As part of their "Green Services" re-org, they earmark a certain amount of R&D spending to these incubator projects. WM certainly is not involved in any sort of collection/transfer/la... services in China. At best, WM could be called North American. They're actually just moving into Canada and have operations in Puerto Rico.
Long WM.
rosenose is right about the dividend, over the past year, I think a lot of different investors were drawn to the stock's 4% yield. The yield was probably pretty attractive, but it was propped up with an uncomfortably high payout ratio. I'm not sure dividend raises were in the near-term cards for management either, as David Steiner has repeatedly stressed the security of the current dividend rather than the future growth of it. He has also stressed using the cash for debt payment and acquisitions, which both seem to be a prudent thing to do to ensure the company remains entrenched as the industry leader despite turbulent recycling markets. I think "pure dividend growth" investors may not like owning it for at least the next year.
unlikely to see WM grow dividend, I think Steiner believes better uses of cash are out there. Nice to see the payout ratio come down from steep levels.
First-Disclosure: I'm long NSC
Great work and service Mr. Konrad. Thanks for doing a bit of investigative journalism. With this article, I have learned something from SA, which is really the reason that I participate here. So I'm not quite sure why the article is being criticized, when it is an example of the benefit that this community can provide. When doing homework on NSC, from now on, I will look for updates. With that being said, I do feel like, as Moses pointed out, that litigious snags are an inevitability for such massive rail companies, and must be factored into the risk calculus when considering a position in any railroad. (pretty sure tobacco companies' investors are well aware of the legal climate and that most companies are constantly fending off an unending stream of suits) That being said, I think Mr. Konrad does a balanced job of assessing what he perceives to be the possible impact on both companies. Speaking as an investor who is long NSC, I'm not going to alter my plans due to this suit, as I'm more than comfortable with the opening price of the position that emerged after the rough patch NSC just went through, and am looking to stay long. Thanks again for the good work! Keep us updated if the corporate goons get back in touch with you!
Interesting article- thanks!
I think another interesting trend going on at Denny's is the franchising initiative. Denny's established a 100m lending program ( to cut down the number of company-run stores, which have a lower margin, flat s-s-s, and are projected to grow 1-2% less than franchised units. Ever since John Miller became CEO, the ratio of company-run stores to franchised stores has improved. The impact of this can be seen in the company's recent surge in free cash flow and the corresponding decrease in debt levels.
You bring up a good point about the expansion opportunities, but it is also no coincidence that all 50 units in China and the 10 in Chile are all franchised units, as these stores come online, the number of company-owned loser units will decrease as the company continues its planned re-franchising efforts on the current store base. According to Denny's investor presentations, of all new restaurants opened in the past year, only 1 is company-run. My speculation is that the unit in question is the company's new flagship location on the Vegas Strip, which I don't think is comparable to any other unit across the company, after all, it is the only restaurant the company operates that you can order a Grand Slam and get married in the same half-hour, around the clock.
I did not know about this Hobbit promotion, do you think it'll be a way to push more expensive, non-2/4/6/8 menu offerings by appealing to LOTR fans? When you speak of Denny's being a "lower point" are you thinking we'll see the same kind of steady push that we saw when Denny's was gradually trekking its way to 5 and change? Thanks again for the great article- Long DENN into earnings at least, got in a while back and might look into some 2.50 may 2013 calls.
WM looks pretty attractive at current valuations. Thanks for an informative article
WM hasn't really rebounded since the notable downgrade, and I'm not sure anything could really be pointed to as a catalyst. If some institutions start a new position or current holders increase the size of their holdings, the buying could pick up the stock.
daustin, do you have a source or link about the refinancing?
Thanks Andersonpa for sharing, as I was a little unclear on the past relationship between Barron's and WM. It shows that you've got significant comprehension and have spent some real time reviewing WM and again, I really do enjoy seeing what you've got to say and respect your input. With that being said, I disagree with several of your claims presented above. You're probably right about efficiency topping out at some point (not sure that any business model efficiency could extend infinitely, certainly there is some saturation point and the "metropolitan" level may be it) but the cohesiveness and scale of a centralized entity that has power and means to "manage" or utilize all the waste across the nation intrigues me because I believe that at some point in time, the sheer amount of trash that WM will "manage" will become more and more marginally useful and profitable (I guess you could call it a special asset). I mentioned urban mining earlier as evidence to support my conclusion, it's worth a google, or at least take a look at the July 17th 2012 Forbes article titled "Welcome to the World of Urban Mining." I think we just view the functionality and utility of having a massive collection, on an unprecedented scale, of discarded materials fundamentally different. Your "trash" is my "treasure" I suppose.
Just a point of clarification in regards to Oakleaf, which was purchased back in 2011 for 425m. WM's revenue for 2011 was 12.5 billion, so I'm not sure I buy that the acquisition was a significant back-breaking expense, but it has eaten up enough to impact shareholders. You are correct that Oakleaf does not own in-house haulers, but they did own contracts with several important retail companies in the Northeast (i.e. Walmart, Sears, Target). I view the Oakleaf purchase as a positive since it opened up several new opportunities for WM to ply their trade with regional haulers that previously served Oakleaf. Thanks again for comment, and thanks to Brant for a good article
WM recently splurged on its acquisition of Oakleaf Env't Services, which ate up significant cash flow, management is pretty specific in pointing to this as the reason a buyback was not initiated. I'm glad to see more WM bulls come out and talk about the stock for reasons other than its yield. I think it is a really exciting place to be in light of recent work coming out about urban mining and its prospects for providing a significant return for companies like WM. Also, anyone know anything about the sale of Veolia Environment (VE) ? I came across a snippet indicating that the French parent company wanted to sell its North American waste business and WM and RSG were licking their chops. I think the dividend is a great way to return significant capital back to shareholders and would rather see WM put buyback money towards R&D and acquisitions that grow the profit potential of operations like the waste-to-energy products. I think success in that field would far outweigh the benefits of hiking up EPS with further buybacks. Long and staying that way on WM
Yo! I've been researching NTIC and all its joint ventures around the world. Wondering if anyone else has been keeping an eye on this under-the-radar forgotten stock.