Covanta Holding Corporation (CVA), which is based in Morristown, N.J., is a  well-known company in the waste management space. It owns and operates infrastructure to convert waste to energy (WtE) and is engaged in related waste transport and disposal and other renewable energy generation businesses. 

Its stock’s price has soared 17.8% over the past month and 48.2% over the past three months to close yesterday’s trading session at $19.97, after hitting its 52-week high of $20.02.

Investors’ optimism surrounding CVA’s proposed sale to EQT Infrastructure is a key driver in the stock’s price rise. However, the proposed acquisition is subject to CVA shareholder approval and customary regulatory approvals, and the company is currently being investigated regarding the proposed sale. In addition, hedge fund sentiment in the stock remained unchanged in the first quarter. So, it’s uncertain if CVA can continue  rallying in the near term.

Here are the factors that we think could shape CVA’s performance in the coming months:

Growing Need for Waste Management Services

Governments worldwide have been taking strict measures to limit waste from various sources in a drive to transition to  a cleaner and green-energy-driven future. According to a MarketsandMarkets report, the waste management market is expected to hit  $542.7 billion by 2026, growing at a 5.1% CAGR. Consequently, CVA is expected to benefit from the increasing demand for waste management services.

Robust Financials

CVA’s total revenue increased 6.4% year-over-year to $498 million for the first quarter ended March 31, 2021. The company’s operating income for the quarter came in at $14 million, versus a $12 million loss  in the year-ago period. Its net income in the quarter was  $2 million, versus  a $32 million loss in the prior-year quarter. CVA’s EPS was $0.01 compared to a $0.24 loss  in the prior-year period.

Ongoing Investigation

Several law firms have launched an investigation into whether the officers or directors of CVA  breached their fiduciary duties or violated the federal securities laws in connection  with the company’s proposed sale to EQT Infrastructure, which it announced on July 14. Under the agreement, EQT will acquire all CVA’s shares for $20.25 per share. It is also being investigated whether EQT is paying too little for the company.

Consensus Price Target Indicates Downside

CVA is currently trading at $19.97, and Wall Street analysts expect the stock to hit $17.17 in the near term, which indicates a potential decline of 14%.

POWR Ratings Reflect Uncertain Near-Term Prospects

CVA has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. CVA has a C grade for Quality. This is justified given its trailing-12-month gross profit margin and EBIT margin of 25.18% and 4.60%, respectively,  which are lower than the 28.98% and 8.29% industry averages.

The stock has a C grade for Sentiment, which is in sync with unfavorable analyst sentiment. CVA also has a C grade for Stability, consistent with its beta of 1.43.

CVA has a C grade for Value as well. This is in keeping with its forward non-GAAP P/E and EV/S of 97.41x and 2.55x, which are higher than the industry averages of 20.41x and 1.88x, respectively.

In addition to the POWR Ratings grades I’ve just highlighted, we’ve also rated CVA for Growth and Momentum. Get all the CVA ratings here.

CVA is ranked #11 of 18 stocks in the Waste Disposal industry.

If you’re looking for top-rated stocks in the same industry with an Overall POWR Rating of Strong Buy or Buy, you can access them here.

Bottom Line

Converting 21 million tons of waste into energy annually, CVA plays a crucial role in transitioning to a sustainable future. However, the company is being investigated regarding its proposed sale to EQT Infrastructure, and it remains to be seen if the sale takes place under the proposed agreement. So, we think it’s better to wait until CVA’s near-term prospects are a little more predictable before investing in its stock. 

CVA shares were trading at $20.05 per share on Tuesday morning, up $0.08 (+0.40%). Year-to-date, CVA has gained 54.31%, versus a 15.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

More Resources for the Stocks in this Article