Rising Star Buy: Veolia Environment

This article is part of our Rising Star Portfolios series.

Water is one of, if not the most, significant and globally coveted commodity there is. In the past century alone, water use has grown at more than twice the rate of population growth, according to the Food and Agriculture Organization of the United Nations. Check out some of these startling statistics courtesy of UN Water research:

  • More than 1/6 of the global population does not have access to the necessary amount of safe freshwater in order to ensure basic health.
  • 2.5 billion people live without basic water sanitation.
  • In developing nations, 70% of industrial waste is dumped, untreated, into water supplies.
  • Over the past 20 years, more than 600,000 people have died related to natural disasters, of which 90% were water-related events.

Not only is water something vital to the health and security of nations, but it is also something that has the potential to erode and afflict massive amounts of people because of environmental destruction.

This is the problem.

The solution: water treatment and distribution, wastewater collection, environmental services, and water desalination. The company that is best positioned to benefit from the enormous amount of money that will pour into the industry over the foreseeable future: Veolia Environment (NYSE: VE  ) .

What it does
Veolia has been around for more than a century and has been an expert in its field for longer than any other company. In fact, it's the largest publicly traded water company and is one of the most direct plays on water treatment, distribution, and environmental safety. Think about the statistics mentioned above, and then consider that Veolia derives about 35% of its revenues from wastewater treatment and about 27% from environmental cleanliness.

Veolia has a private-public business model, which means that many state and local governments employ it for its wide array of services. This is beneficial for the company because many times it does not have to put up capital for infrastructure; it only ensures services that it has more than 150 years of experience in. Although the U.S. currently only accounts for a small portion of Veolia's revenues, about 85%-90% of U.S. water municipalities operate themselves, and, considering the need to bring in the private sector to help governments cut costs, this seems like a huge opportunity for Veolia. In fact, the 2005 Water Partnership Council stated that public-private partnerships could slash costs by as much as 25%.

Veolia also has a tremendous amount of growth opportunities internationally. Currently, the company only earns 3% of revenues from the Middle East and 7% from Asia; however, as emerging markets explode, both from population and economic perspectives, the need for clean water and waste services will only increase exponentially. Veolia is well-suited to take advantage of this trend because it (a) has more expertise than any other company, (b) is strategically located in Europe, close to various parts of the world, and (c) has the most vertically integrated business offerings on the market. And it's already starting to take advantage: It built and now operates the world's largest desalination plant in the Middle East.

Latest results and comparisons
Veolia had a solid 2010; consolidated revenue increased by 2.5%, and in particular, revenue in environmental services went up by 7%. Although net income was down, the company has suggested that its adjusted operating profit will rise between 4% and 8% in 2011, which in part is going to be a product of asset sales and cost cutting.

Veolia has been focused on cost savings: It anticipates $350 million in 2011, and it sold assets worth at least $3.5 billion during 2009 and 2010. In addition, the company plans to divest some of its non-core businesses -- which could be its transportation segment -- in the hopes of generating more cash flow and reducing capital costs.

The company, however, certainly isn't perfect. It's highly leveraged and has a debt/equity ratio of almost 200%, which is in part why it's so ready to sell off some non-core assets. Fuel costs also make up a substantial part of expenses, and as the price for fuel rises, margins will get slammed unless Veolia can pass those costs onto its customers.

Regardless, Veolia still looks like one of the cheapest bets in the industry, considering its solid dividend and growth prospects. Take a look below:

Company

P/E Ratio

5-Year Estimated Growth

Dividend Yield

Veolia Environment

18.9

13.5%

4.0%

Waste Management (NYSE: WM  )

18.8

9.8%

3.7%

Republic Services (NYSE: RSG  )

22.8

14.8%

2.7%

Waste Connections (NYSE: WCN  )

24.7

16%

1.1%

Source: Yahoo! Finance.

Although the stock isn't screaming dirt cheap, it's among the most reasonable of the group, and is well below both its industry average (19.6) and its own personal five-year average (25.0).

The Foolish bottom line
Veolia is set up as a one-stop shop for all things related to water and the environment -- truly a unique company in that respect. There are other competent players in the field, but none of which have the expertise and global reach that Veolia offers. If you agree that water distribution and treatment are going to be massive drivers for this industry, then Veolia is as good a play as any. I don't expect this stock to "pop" immediately, but rather I'm adding it to my real-money portfolio as part of a much longer-term play.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).

Jordan DiPietro owns shares of Waste Management. Waste Management is a Motley Fool Inside Value recommendation. Republic Services and Waste Management are Motley Fool Income Investor picks. The 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.


Read/Post Comments (2) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 31, 2011, at 5:34 PM, easyavenue wrote:

    Is your 5 Year Est. Growth an annual figure?

    If 27% of revenue is from "environmental" work then why use waste disposal companies for comparison? Wouldn't other companies with water expertise (Not sure who... GE, American Water, WTR maybe?) make for a stronger comparison?

    You don't quite seem convinced this is a good buy at this time. At least I don't feel your article is convincing. No offense intended.

  • Report this Comment On April 03, 2011, at 12:01 AM, Plantanista wrote:

    Due diligence might involve researching the long term success and contract retention in the municipalities where this company does business...

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