I first became aware of Covanta (NYSE:CVA) while poring over the shareholder letters of Marty Whitman's Third Avenue Value Fund. I took a minute to look over the business, which is primarily engaged in waste processing and energy generation, and then threw the ticker onto my watch list and promptly forgot about it.
That was about 80% ago. Not too long ago, I heard the name Covanta again during a Bloomberg interview of company Chairman Sam Zell, the Chicago real estate mogul who has been in the news quite a bit lately as both a buyer and a seller. Zell's stake in Covanta is valued at nearly half a billion dollars, while Whitman's fund holds about $200 million worth. With these two hugely successful investors on board, I just had to take a closer look.
Covanta has an intriguing business model. Imagine if Coca-Cola (NYSE:KO) could charge corn refiners to take the corn syrup off their hands and also got paid for the Coke it sold back to consumers. Or how about if coffee growers ponied up for the privilege of dropping their beans at Starbucks' (NASDAQ:SBUX) doorstep, enabling the company to turn around and sell back the beans to customers in the form of java.
Sounds ridiculous, right? Well, Covanta deals in ickier raw materials -- municipal solid waste. So icky, in fact, that municipalities pay Covanta to process the waste, which the company uses to generate electricity or steam. Sales of energy on the back end produce a second revenue stream.
Of course, this is an extremely capital-intensive business. The capacity to process a municipality's waste has to be built from scratch. Fortunately, tax-exempt bonds provide some of the financing for these construction projects, which certainly makes them more palatable. Also, the high level of free cash thrown off by this type of operation contributes to paying down the project debt within a reasonable time frame. It certainly helps that contracts are written for up to 20-year periods, providing a long-term, predictable revenue stream.
In addition to this basic dollars-and-cents view, Covanta has an environmental angle going for it. The energy produced via its exclusively licensed mass-burn technology is clearly renewable; it is reliable -- i.e., not sourced from a politically unstable region of the world; and it is relatively clean, compared with a coal-fired power plant. In a very heavily regulated industry, Covanta appears to be very well positioned in the face of potential energy and climate change regulations.
I have provided only a partial glimpse of Covanta's operations. The company operates non-waste-related renewable-energy projects in the U.S. and Italy, and it generates power the old-fashioned way in several developing countries. Perhaps most intriguing on the international scene is Covanta's recent acquisition of a 40% interest in a Chinese waste-to-energy firm.
If you want to learn more, the recently filed 10-K is a great place to start. At 300 pages, you'll need to generate some energy to get through all the details. You might even need to burn the midnight oil. But if, like me, you're considering an investment here, it's certainly not a waste of your time.
Think it's not easy being green? Here's more clean-tech Foolishness to get you up to speed:
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Fool contributor Toby Shute once got someone to pay him to take some pesky trash off his hands. You can contact him at [email protected] for the rest of that story. He doesn't own shares in any company mentioned in the story. Starbucks is a
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