Live Case One
LIVE CASE ONE
Covanta Holding Corp (CVA)
Anish Puri
Introduction
Covanta Holding Corporation is an American multinational firm headquartered in Morristown, New Jersey and operates in the renewable energy industry. The firm was incorporated in 1992 in Delaware. Covanta’s main business is to convert waste into energy through its subsidiaries. The company operates in North America and also holds interests in energy-from-waste facilities in Italy and Ireland. In addition, the company owns infrastructure business in China. Its corporate culture is focused on the bottom line of sustainability which involves people, planet, and prosperity. The objective of the study is to analyze the financial and nonfinancial information and evaluate the performance of the business management.
A. Financial Information about Covanta Holding Corp
The mission of the company is to provide sustainable waste management and energy solutions to its clients. This is achieved by offering waste management services and operating the infrastructure required to generate energy. Energy-from-waste (EfW) facilities generate power through the combustion of non-hazardous waste. The combustion process converts the waste into inert ash and at the same time extract both ferrous and nonferrous metals for recycling.
Covanta trades at NYSE under the ticker symbol CVA, the shares are currently trading at $15.20 (Reuters, 2018). In addition, the common stock has a par value of $0.10 per share. The company’s income statement analysis is as shown in Table 1 below;
| 2016 (millions) | Percentage change | 2015 (millions) | Percentage change | 2014 (millions) | |
| Operating revenue | $1,699 | 3.28% | $1,645 | -2.20% | $1,682 |
| Operating expense | $1,590 | 3.52% | $1,536 | 2.01% | $1,528 |
| Operating income | $109 | 0.00% | $109 | -29.22% | $154 |
| Net income/loss | -$4 | -105.88% | $68 | 3500.00% | -$2 |
Table 1- Income statement analysis Source (“Securities Exchange Commission,” 2017)
According to the income statement, the company’s operating revenue reflects a positive trend from 2014 to 2016. Even though the firm’s operating revenue decline in 2015 by -2.20% it recovered in 2016 by posting a 3.38% increase in the operating revenue. However, the operating expense increased at a rate of 3.52% in 2016 than the operating income which increased by 3.38% during the same period. On the other hand, the operating income declined by -29.22% in 2015 and remained the same ($109 million) in 2016. Also, the business recorded a poor performance in terms of net income by posting net losses of $2and $4 in 2014 and 2016 respectively. Generally, the net income improved by 3500% in 2015 and later declined by -105.88% in 2016. The decline in profitability can be attributed to the rising operating expense.
Table 2 below shows a three-year trend in the statement of financial position items.
| 2016 (millions) | Percentage change | 2015 (millions) | Percentage change | 2014 (millions) | |
| Current assets | $544 | -21.95% | $697 | 10.46% | $631 |
| Fixed assets | $3,740 | 5.74% | $3,537 | -1.01% | $3,573 |
| Total assets | $4,284 | 1.18% | $4,234 | 0.71% | $4,204 |
| Capital + Liabilities | |||||
| Total liabilities | $3,815 | 6.15% | $3,594 | 10.93% | $3,240 |
| Equity | $469 | -26.49% | $638 | -18.62% | $784 |
| Total equity and liabilities | $4,284 | 1.18% | $4,234 | 0.71% | $4,204 |
Table 2- Statement of financial position analysis. Source (“Securities Exchange Commission,” 2017).
The value of the current assets is declining by -21.95% from 2015 to 2016. Although the current assets increased by 10.46% in 2015, the business was unable to maintain the trend. On the other hand, the value of the fixed assets reduced by -1.01% in 2015 and increased by 5.74% in 2016. Subsequently, the total assets increased by 0.71% and 1.18 % in 2015 and 2016 respectively.
B. Energy Sector Analysis
The firm’s main competitors include Waste Management Inc., Republic Services Inc., Stericycle Inc., and Waste Connections Inc. (“MorningStar”, 2018). Table 3 below compares the business profitability to its peers.
| Profitability ratios | Covanta Holding Corp | Sector |
| Gross margin ( five-year average) | 35.90 | 29.20 |
| Earnings before interest, tax, and dividend (five-year average) | 24.47 | 19.18 |
| Operating margin | 5.13 | 11.74 |
| Net profit margin | -3.97 | 9.39 |
| Effective tax rate (five-year average) | 11.84 | 29.89 |
Table 3-Profitability analysis source (“Reuters,” 2018)
Covanta has a high five-year average gross margin ratio of 35.90 compared to 29.20 posted by the sector. This means that the business generated higher gross profit than the average gross profit of other firms in the sector. Also, the firm reported higher earnings before interest-tax-and-dividend ratio of 24.47 that the sector’s ratio of 19.18. however, Covanta has a lower operating margin ratio of 5.13 while the sector reported a higher ratio of 11.74. In addition, the company recorded a loss of -3.97 while the sector reported a profit margin ratio of 9.39%. This means that the business has cost management challenges. This is due to the fact that the company has higher gross margin than the sector but it is operating at a loss. On the other hand, the sector has a lower gross margin but the firms are able to generate a higher net profit margin. Table 4 below compares the company performance in terms of revenue generation to the sector.
| Ratios | Covanta Holding Corp | Sector |
| Asset turnover | 0.40 | 0.68 |
| Revenue/employee | 476,111 | 749,252,371 |
| Net income/employee | -18,889 | 63,597,805 |
| Return on investment | -1.72 | 7.73 |
| Return on equity | -15.81 | 14.36 |
Table 4- Revenue analysis source (“Reuters,” 2018)
The company performed poorly in terms of revenue generation from the available resources. The utilization of the business assets to generate revenue was below the sector. An asset turnover of 0.40 means that the management was only able to generate $0.4 from one dolllar invested in assets. On the other hand, its peers were able to generate an average of $0.68 from every dollar invested in assets. In addition, the sector had a higher revenue/employee ratio compared to Covanta. Besides this, the renewable energy company recorded a negative income/employee of -18,889 while the sector posted a higher ratio of 63,597,805. A negative revenue/employee ratio means that the business paid the employees from borrowed funds. Generally, the company reported a negative return of -1.72 on investment while the sector performed better by posting average ratio of 7.73. This means that other firms in the sector are able to generate income from the amount invested (Farris et al., 2017). Finally, the business recorded a negative return on equity while the sector performed better by generating higher returns on the owners’ equity.
The Overall Energy Industry
According to Motyka (2017), the renewable energy industry is expected to perform well in 2018. However, the industry faces unusual uncertainty from the proposed tax policies. The proposed policies include the reduction of the production tax credit which may affect the supply of equity in the industry (Motyka, 2017). The policies have not yet been finalized and they are expected to have a short-term impact in the industry. Subsequently, the industry is expected to expand in the long-term due to the rising demand for renewable energy. On the other hand, the municipal solid waste is generated in vast quantities and this means that Covanta will expand its operations in future.
C. Covanta’s Products, Management, Operations, and Business Model
The company products are designed to provide environmental solutions across a wide range of industries. Covanta operates a nationwide network of liquid and solid recycling plants. Also, the company converts approximately 20 million tons of waste into energy and recycles approximately 0.5 million tons of ferrous and nonferrous metals (“Covanta,” 2018).
The company operations reduce approximately one ton of greenhouse gas emissions. The business sustainability report focuses on various stakeholders including employees, clients, community, and the investors. The business prioritizes employees safety and health. Also, the management emphasizes a good relationship with the community. The company invests human and financial resources in areas where the plants are located. On the other hand, the business ensures that their clients have access ton sustainable waste management. The services are tailored to meet customers’ demand. Finally, the company value investors by providing a sustainable business to the customers.
The company’s business model generates a high percentage of the revenue from solid waste and liquid management. Covanta charges fees for acquiring waste from municipalities. The second source of revenue is energy generated from the waste. The waste incineration process generates energy which powers electric generators. Subsequently, the business sells electricity through spot and contracts markets. In addition, the business generates a small portion of revenue from recycling metals.
The performance of the management is below the sector average. For example, the management was unable to generate a return on equity by reporting a loss while the peers managed to generate a positive return on equity. In addition, the dividend payout is unstainable since the firm is highly leveraged. According to “Reuters” (2017), Covanta’s total debt to equity ratio is 851.04 while the sector has an average of 91.57. in addition, the firm is operating below the S&P 500 and waste management firms
Conclusion
Covanta Holding Corp has positively impacted the environment by reducing greenhouse gas emission by approximately one ton annually. Also, the firm has developed a sustainable business model with aim of converting waste to energy for one million families. However, the business profitability has declined from 2014 to 2016. This can be attributed to the firm’s overreliance on external borrowing which increases the interest expense. Finally, the management performance is below the sector average.
References
Covanta. (2018, January). Energy-from-Waste. Retrieved from Covanta: https://www.covanta.com/Sustainability/Energy-from-Waste
Farris, P. (2017). Key Marketing Metrics: The 50+ metrics every manager needs to know. London: Pearson UK.
Morningstar. (2018, January 7). Covanta Holding Corp. Retrieved from MorningStar: http://financials.morningstar.com/competitors/industry-peer.action?t=CVA®ion=usa&culture=en-US
Motyka, M. (2017). 2018 Outlook on Renewable Energy. Washington, D.C.: Deloitte.
Reuters. (2018, January 7). Covanta Holding Corp (CVA). Retrieved from Reuters: https://www.reuters.com/finance/stocks/financial-highlights/CVA
Securities Exchange Commission. (2017, February 17). Covanta Corporation-form 10-K. Retrieved from Securities Exchange Commission: http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_CVA_2016.pdf
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