This Company is like an Energy Industry Tech Incubator

Cutting edge energy technology is risky to invest in, but Waste Management's massive trash hauling operation is easily supporting its energy investments.

Apr 7, 2014 at 10:10AM

Covanta (NYSE:CVA) makes power from trash. Solazyme (NASDAQ:SZYM) and FutureFuel (NYSE:FF) focus on bio-diesel. Waste Management (NYSE:WM) does both. That makes this dividend paying stalwart a one-stop shop for high-tech alternative energy investing.

Powering up
Covanta gets paid to pick up trash, paid for the recyclables it pulls out, and paid for energy it produces from burning trash at its over 45 waste to energy facilities—otherwise known as power plants. It's a relative small fry, producing 1,500 megawatts of power, but it's making money off of your trash every day.

Although Sam Zell-backed Covanta might seem unique, Waste Management is doing the same thing. It just isn't doing it at the same scale, yet. The country's largest trash hauler has just 17 waste-to-energy plants; not as big as Covanta, but there's plenty of opportunity for growth.


(Source: GTD Aquitaine, via Wikimedia Commons)

Covanta, for example, handles a total of around 20 million tons of waste a year or roughly the volume of just Waste Management's recycling business. (For reference, Covanta recycles around 450,000 tons of metal a year.) Waste Management's waste-to-energy plants took in 7.5 million tons of waste last year.

Unfortunately, volume isn't the only factor in the equation. For example, low power prices led Waste Management to write down the value of its waste-to-energy division in 2013. Covanta's bottom line bled a nickle of red ink over the same time frame That's not exactly a good sign for Waste Management or Covanta, but turning garbage into power will likely be an increasingly valuable alternative to shoving trash in a landfill over time. After all, there are only so many landfills around and no one (no one!) wants a landfill in their backyard.

If you have to put it in the ground
That said, if you are shoving refuse into a landfill, why not make some energy from that, too? That's exactly what Waste Management does at nearly 140 landfills. And it just inked a partnership with NRG Energy (NYSE:NRG) and several private companies to take the gas from its landfills and turn it into liquid fuels and chemicals.

NRG is no stranger to cutting edge energy projects like this. It is a partner in the giant Ivanpah solar installation (so large you can supposedly see it from outer space). And it just bought a rooftop solar power company that, effectively, helps utility customers generate their own electricity. So working with Waste Management to turn landfills into energy sources is right up the company's alley.


(Source: Aioannides, via Wikimedia Commons)

The first project between Waste Management and NRG is being developed right now, with a final green light expected later in the year. This is a different take on what Solazyme and FutureFuel do today. Solazyme uses algae to turn waste like corn husks into bio-fuel. FutureFuel takes in such lovely leftovers as pork lard. Neither, however, is focused on turning human trash into energy the way Waste Management is.

Interestingly, in FutureFuel's annual report it warns that it might exit the bio-fuel market in the business description section. A relatively small company, it lacks the staying power of a giant like Waste Management. Note that Solazyme, while also a small company, has big name partners like the U.S. Navy and Archer Daniels Midland (NYSE:ADM). That said, unlike FutureFuel, it isn't making any money. This pair's technology may be exciting, but it certainly isn't proven just yet.

Riding the razor's edge
Investing in cutting edge technology isn't for most conservative investors. However, if you want to be at the cutting edge of the energy market, you might want to take a look at Waste Management. It's the nation's largest trash hauler, which gives it a solid core business. And it's using its trash expertise to innovate in the energy market in the same ways that smaller, more focused companies are.

If you are a conservative investor, think of Waste Management as a refuse company running an energy technology incubator. That, and a 3.7% or so dividend yield, are a pretty compelling reasons to own what some would consider a boring company.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Waste Management. The Motley Fool owns shares of Solazyme and 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.

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