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Why Covanta Might Be a Wasted Opportunity

By Brian D. Pacampara, CFA - Oct 17, 2013 at 10:12AM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Covanta ( CVA ) slipped 1.5% this morning after Wedbush downgraded the waste management company from outperform to neutral.

So what: Along with the downgrade, analyst Al Kaschalk lowered his price target to $23 (from $24), representing about 5% worth of upside to yesterday's close. While Kaschalk remains bullish on Covanta's long-term growth prospects, he thinks that some near-term risks could weigh on the stock's already rich valuation.

Now what: Wedbush sees limited upside at Covanta's current levels. "[We] are downgrading the shares due to what we believe is: (i) weak project pipeline for the construction of large greenfield waste energy plants; (ii) near-term headwinds from above market contract transitions and a reduction in debt service revenue, and (iii) shares trading at the upper end of the ir five-year CF and EBITDA multiple," noted Wedbush. With the stock currently boasting a 3%-plus dividend yield, however, those short-term concerns might be providing patient Fools with a solid long-term income opportunity.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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