Image source: Veolia Environmental.
Veolia Environmental (VEOEY 1.58%) has been a huge hit for investors who have owned the stock during the past four years. Between January 2012 and today, the stock has returned 160% -- including its outsize dividends. That's walloping the market by almost 90 percentage points.
Back then, Veolia was a bloated company, because leading up to the Great Recession, it took on too much debt to expand its reach well outside of its areas of expertise. The turning point was when the company got rid of former CEO Henri Proglio, and hired its current leader, Antoine Frerot.
Frerot promised to sell off ancillary businesses, bring costs under control, and focus on the activities where Veolia actually had opportunities to grow, and deep institutional knowledge -- primarily in waste and water management. The company's third-quarter results -- released last month -- proved that Frerot's plan is working.
Veolia Environmental results: Just the numbers
Here's how the company's results stack up through the first nine months of 2015.
|
Revenue |
Revenue Growth |
Net Income |
Net Income Growth |
|---|---|---|---|
|
18.3 billion euros |
6.1% (2.4% at constant FX) |
410 million euros |
102% |
Data source: S&P Capital IQ, Veolia IR. FX = foreign exchange.
While revenue growth has been tepid, that was expected -- the company has been selling off many of its businesses, and this necessarily cuts down on revenue. With those sell-offs, however, come huge savings through both spending cuts and reduction of long-term debt.
The company had set a goal to cut spending by 750 million euros during 2015, and it already accomplished that through just three quarters. This helps explain how just a 6% bump in revenue could lead to a doubling of net income.
What happened with Veolia this quarter?
Veolia has two key divisions, and each reported impressive wins for the company. Among the larger contracts for Veolia's Municipal division:
- A 12-year contract, worth as much as 105 million euros, with Rochefort, France to convert waste to energy.
- Traditional waste services contract signed in Australia. Over 10 years, it is expected to bring in as much as 469 million euros.
There were also several significant deals for the company's Industrial and Commercial units:
- The operation of a biomass plant in Ghent, Belgium is expected to bring in 150 million euros during the next 15 years.
- And here in America, the company signed an agreement with Antero Resources to operate a fracking water reuse and recycle plant that could end up being worth as much as 357 million euros.
This final contract is especially impressive, as oil prices have kept demand relatively low, and regulations don't currently require such services to be employed.
What management had to say
From a financial standpoint, CFO Philippe Capron didn't hide how well the company has performed relative to the expectations it set: "In a nutshell, we can say that the annual guidance, nine months into the year, is pretty much already in the bag."
That should be music to investors' ears, especially those who bought Veolia because of its rather large payout -- which currently stands at 3.3%. Capron pointed out that net income through the first nine months will more than cover the company's dividend -- which could mean that there'll be an increase on the horizon.
Remember, many European companies -- Veolia included -- have variable dividends that are determined by the net income and free cash flow that the company is able to generate over the previous 12-month period.
Capron summed up the view from 30,000 feet by saying, "We [are starting] to see the fundamental health of the business showing up. Added to this, cost-reduction efforts have continued at a very good pace."
Looking forward
Veolia is a tough beast to value. There are so many moving parts, so much debt -- though it's still being reduced at a stable rate -- and a lot of effects from exchange rates.
The best I can do is relay management's own expectations moving forward: It expects to meet all of its previously stated goals for 2016. Pay close attention to debt reduction, and the effect that incremental increases in revenue can have on net income.
