Covanta Holding Corp is a mixture of an energy company and a trash collector, and those two businesses are complimentary, not disparate operations. Which is why it's so concerning that trash hauling volumes have been sagging in the United States. And now that Germany is importing trash to feed its waste-to-energy plants, you might want to take a closer look at this lingering trend..
Continue Reading Below
What it doesCovanta's business is twofold. On one side, it collects garbage like giant Waste Management . This business made up roughly two-thirds of Covanta's revenues through the first nine months of the year. However, it's what comes next that's really interesting. Like other trash haulers, Covanta pulls out what it can to recycle (4% of revenues) and then burns a lot of the rest to generate electricity.
The power operation makes up about 25% of Covanta's top line. Interestingly, the trash hauling business has seen a revenue increase of nearly 6% so far this year, while the power segment has seen revenues decline almost 9% -- which is why the comparison to Waste Management is so interesting. Waste Management once did the same thing, but it sold its waste-to-energy business for roughly $1.94 billion in 2014 because of low energy prices.
But waste to energy was a small part of what Waste Management did, representing only around 5% or so of the overall business; the trash giant could shift gears without too much of an impact. Waste to energy is core to Covanta's business model and a much bigger piece of the top line.
Gotta do something with itOn one hand, you can look at Covanta's business and think it's a great idea to dispose of trash and generate energy at the same time.But shift the view a little, and that trash Covanta is hauling is also a vital fuel source for the company. So trash volumes take on a double meaning.
For example, industry giant Waste Management's trash volumes have been flat to lower since the start of the decade because of a sluggish economy. That means it's pushing less rubbish through its system and that limits how much it makes, which has been a drag on the stock. That same industry headwind is facing Covanta, a much smaller company, only Covanta is also looking to fuel its power plants.So both companies face troubling top-line headwinds, but the impact on Covanta has the potential to be more pervasive.
Which is why news that Germany and Sweden are importing rubbish for their waste-to-energy plants because they don't make enough trash of their own should be concerning.The culprit? Conscientious citizens. These nations are seeing high levels of recycling and conservation. Germany's recycling rate, for example, is as high as 65%, according to some estimates. Couple that with stagnant or declining populations, and waste-to-energy power plants are, literally, begging for more trash. The U.S. recycling rate is closer to 35% according to the EPA, so U.S. trash haulers aren't facing the same headwinds... yet.
A Covanta facility. Image source: Covanta Holding Corp.
Not the end of the world...yetThe United States is increasingly focused on improving its environmental footprint, including a recent push to limit food waste in the garbage stream. Emerson Electric Co.'s Grind 2 Energy business, for example, takes food waste and turns it into energy directly on site. That's great for the customer and Emerson, since the business is paid for by a recurring service fee, but it's horrible for trash haulers. In a test of Grind 2 Energy, one customer trimmed its trash pick-ups from eight times a month to just one.
That's seven truckloads of trash that Waste Management and Covanta don't get paid to haul. A fact that could make it increasingly difficult to get volumes growing again. So far it's been the economy that's the biggest drag on volumes, but Grind 2 Energy shows that conscientious Americans could be the next big issue on the volume front.
But it's worse for Covanta. What if it was counting on those eight trucks full of trash to power one of its waste-to-energy plants? There's a tipping point where it could be forced to look outside its own route business for "fuel" or, like Waste Management, consider chucking the whole waste-to-energy business--25% of its operations.
The big headline for trash haulers like Waste Management and Covanta has been the heavy hit from falling commodity prices, which reduces what they get paid for their recycling efforts. Underneath that news a slow economy has limited volumes and pricing power in the bread and butter hauling business. It's worth keeping a close eye on the latter issue, even though it's taken a back seat to commodity prices. And a worthwhile concern is that even if economic growth picks up, it may not translate into increased volumes for trash haulers as the U.S. gets increasingly more concerned about the environment, like some developed European markets. That's just got a double meaning for Covanta, a fact that Germany's trash imports highlight all too clearly.
The article 1 Company That Thinks the World Needs More Garbage originally appeared on Fool.com.
Reuben Brewer has no position in any stocks mentioned, but actively makes trash on a regular basis. The Motley Fool owns shares of Waste Management. The Motley Fool recommends Emerson Electric. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.