Energy-From-Waste: A Potential Growth Segment
usman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The global energy crisis is one of the most pressing matter these days. Countries are taking efficient initiatives to increase their energy supply and energy-from-waste is one of them. A number of companies in the U.S. are operating in this business segment. All they do is collect waste material and transform it into electricity and metals. The concept has wide acceptance and is projected to grow in the future.
With huge landfills present in the U.K. and the U.S., both these countries offer a lot of opportunities for waste processing companies to transform it into energy. Similarly, developing industrial economies like China and India would also move towards this concept in near future.
Thus, companies involved in this industry should expect solid growth in the coming years. I will take a look at some of the waste management companies and see if they are capable of riding the growth trend.
Global leader in waste processing: Covanta
One of the biggest global energy from waste companies based in the U.S. is Covanta (NYSE: CVA). Operating with 40 EFW facilities in the U.S., three in China, and one in Italy, Covanta is quite a successful venture in the segment. Its business model helps it generate revenue from waste disposal, electricity generation, and through the sale of recycled ferrous and non-ferrous metals extracted from waste materials.
In 2012, the company made approximately $1 billion, i.e. 62% of its revenue, from waste disposal, whereas electricity and steam sales were $367 million, making up for 24% of the revenue reported.
The company’s business model is structured into three segments; tip fee, service fee owned, and service fee operated projects. In the tip fee segment, the company is paid to dispose-off waste materials. The company retains 100% of the waste for the production of energy and metals. In the service fee owned and operated segment, a certain amount of profit is shared by the client. There is a huge margin of growth in this sector, and that is why a number of companies are in competition with Covanta in the U.S.
Comparison with major peers
Waste Management (NYSE: WM) and Waste Connections (NYSE: WCN) are among the peers of Covanta in the U.S. Both these companies are bigger when compared to Covanta, but luckily, their prime operation is not in energy from waste. Though Waste Management produced 5.3 billion KWH of electricity through the processing of 7.7 million tons of waste, it is confined to the U.S. and its other major operations regarding waste conversion and recycling are also its main priority.
Waste Management is surely one of the giants, but currently it is focusing more on its recycling process. Recently, the company acquired Greenstar, which is one of the country’s largest private recycler. This would surely expand Waste Management’s recycling capabilities, but would not bring any growth in its energy from waste segment.
Similarly, Waste Connections also has a vast and well diversified E&P asset base, but the company needs to consolidate its position further within the sector. This can be achieved only if it increases its activities associated with energy and power generation. The projected increase of 3.1% in industrial solid waste for the next 13 years would play a part in providing the company with an opportunity to grow.
Covanta, on the other hand, processes a combined 20 million tons of waste in its facilities worldwide. It is quite optimistic about its growth in the U.S. and the U.K. due to the large amount of land fills in these countries. The figure below shows the landfills which can be utilized in the energy from waste process.
Source: Company presentation
Also, the company’s presence in China would also ensure long-term growth in the Asian market. Currently, there are some 100 energy from waste facilities in China, but still, 90% of its rivers are being polluted due to lesser disposal and recycling of waste. This indicates an opportunity for Covanta, as it currently has three plants in China and the waste from energy industry in the country still has enough room for Covanta to easily expand its business.
Moreover, the Chinese government is also facilitating the companies operating in the energy from waste sector by providing a credit of about $30 per MWH of electricity generated by EFW instead of fossil fuels.
Furthermore, the company is also keeping its investors happy with a decent dividend rate. Covanta is offering a 4.07% dividend yield to its shareholders. Waste Management, on the other hand, is offering more than Covanta at 4.21%, while Waste Connections is giving out only 1%. Though Waste Management is offering greater dividends, it is not offering investors with a clear growth picture. On the other hand, Covanta has better growth prospects and is not lagging far behind in terms of dividend yield.
For an investor who would want to invest in a company which can ensure growth should buy Covanta, while those who want to invest into a stable company and pocket some hefty dividends should buy Waste Management.
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usman iftikhar has no position in any stocks mentioned. The Motley Fool recommends Waste Management. The Motley Fool owns shares of Waste Management. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!