The Biggest Threat to Veolia Environnement Stock
Image Source: Veolia Environnment.
In 2011 Veolia Environnement started on the path of change. It was at the same time too diversified, and yet somehow too reliant, on its home country. Today, it's a much better-positioned enterprise, and investors have started to expect good things -- which is why the biggest threat to Veolia Environnementstock could be a break in the progress.
In 2011, France accounted for around 40% of Veolia's revenue. That wouldn't be so bad, but France is only about the size of Texas, so that's actually not such a big market when you really think about it. At the same time, however, the municipal water, waste, and energy company also had operations in 76 other countries. It was, at the same time, too focused and too diversified.
Jump forward to today, and France is still the company's largest single market at around 22% of revenues, but it no longer overshadows its operations in size. For example, the rest of Europe accounts for 35% of revenues, and countries outside of Europe make up 23%. Its global businesses chip in for the rest. Veolia today is much more diversified, but it's also more focused, because it only operates in a total of 45 countries today.
Image Source: Veolia Environnment
The big change was the decision to sell off assets, and focus on running a leaner and meaner company. It sold around $7 billion dollars worth of businesses, brought debt down from 70% of the capital structure to around 50%, and trimmed costs by about $900 million. Basically, the company has done a good job of righting the ship, including a return to dividend growth in 2015.
That's all great, but investors always look toward the future. So the issue is, what will Veolia do from here? Now that investors are getting used to a new Veolia, the real threat is that the company falters. But how realistic is that?
On the one hand Veolia has a fairly diversified business. That's both a geographic issue and an industry one. The company's water business, which provides water services for municipal customers, accounts for around 45% of revenues. Its waste operations, which do everything from trash hauling to recycling, pitches in 35%, and its energy unit, which manages power plants, makes up the final 20% or so. Diversification should provide some notable benefits on the risk front.
You can really break down the company's future prospects into broader categories, like developed and developing markets. In the former, the issue will be about supporting, and replacing, mature infrastructure. In still-growing nations, the issue is building new from the ground up.
Both, however, are pretty reliant on big-picture economic issues. For example, the commodity downturn has hit emerging markets reliant on exporting their natural resources pretty hard, making cash for growth projects harder to come buy on both the commercial and government sides of the equation. In mature markets, growth has been hard to come by, too, with only a few pockets of strength in select countries around the world. That could lead to less spending, as well.
Image Source: Veolia Environnment.
What Veolia does is very important to everyday life, so it's not like spending can just be stopped, or put off indefinitely. But now that the transformation of the portfolio is just about over, cutting costs, reducing debt, and trimming the portfolio won't be enough to show continued improvement. Business growth is going to become more important.
It's worth noting that 2015 saw revenues decline 1.5% in France. Moreover, if you take out the impact of currency moves, the rest of Europe saw a revenue decline of 1.2%, and the global business' top line declined 3.3%. The lone standout was the "rest of the world" (around half the business), which includes the emerging markets, which saw revenue advance 3.5%. So there really are solid reasons to be concerned about the threat of Veolia not living up to its own projections.
Veolia has done an admirable job of restructuring its business. But now that this process is largely complete, it needs to start growing again. The biggest threat to the stock is that the current market environment makes achieving that goal harder than Veolia and its shareholders expect. Keep a close eye on the company's results now that the rubber is meeting the road.
The article The Biggest Threat to Veolia Environnement Stock originally appeared on Fool.com.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Veolia Environnement (ADR). 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.
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