By Tom Konrad, Ph.D., CFA
You don’t have to own mining companies to benefit from rising metals prices.
This is a roundup of first quarter earnings notes shared with my Patreon supporters over the last week. Waste to energy operator Covanta and specialty metals recycler Umicore are both benefiting from skyrocketing metals prices.
Just as renewable energy and energy efficiency stocks have long shown that investors don’t have to own fossil fuel companies to benefit from rising prices of fossil fuels, recyclers like Covanta and Umicore are showing that you don’t have to own environmentally damaging mining companies to benefit from rising metals prices.
Everyone could find something to like in last week’s first quarter earnings at Covanta (CVA).
Revenue and income all showed strong growth over the prior year. This was driven by strong pricing trends in metals, waste disposal (“tip”) fees, and energy prices. These gains were achieved despite higher planned outages for maintenance in 2021 compared to the prior year. This will reduce the need for additional maintenance outages later in the year.
In addition, the company increased its guidance for the full year, and expects further improvements to come from the strategic review as it renegotiates contracts or closes unprofitable operations. It seems likely that many of these renegotiations will come at the 19 municipally owned plants in the US that it operates under contract. The company also anticipates significant savings from overhead.
In short, everything is coming up roses.
- The company is performing well
- The macroeconomic environment is favorable
- New plants will be coming online over the next 3 years in the profitable UK market
- Additional savings are expected from the strategic review.
Covanta is definitely a stock to hold even in this relatively overvalued market.
Umicore and Hydrogen
Umicore (UMICF, UMICY, UMI.BR) released its first quarter update as well as a presentation on its positioning in the hydrogen economy in late April.
In the business update, they’re driving with fully charged batteries:
- Metals, and especially the precious metals, prices are soaring, boosting their recycling business (which also increased its volumes)
- Automotive production is recovering, helping their catalysis business. The shift away from light duty diesel vehicles is also helping them increase market share.
Umicore currently expects its 2021 earnings to slightly exceed the guidance released just in February.
With much talk of the hydrogen economy, especially in Europe, Umicore released a timely presentation on how they have and expect to participate. The company already has a strong position as a supplier of catalysts for the PEM fuel cells used in Fuel Cell Vehicles (FCVs), and have won a number of supply contracts for future fuel cell vehicle platforms. As of 2020, Hyundai Motor has produced 6,781 Fuel Cell Vehicles using Umicore as a supplier.
They also announced a new partnership with Anglo American Platinum (AAL.L, ANGPF, ANGPY) to develop a liquid carrier which would be used in hydrogen transportation. They see significant long term growth potential in both this and as a supplier of catalysts to the electrolyzer market.
It was hard to describe Umicore as a value stock when I added it to the 10 Clean Energy Stocks list at the start of the year, and it’s even harder today, given the 30% appreciation since then, I continue to value it for the exposure it gives to the materials used in clean transportation technologies. Other ways to get this type of exposure include mining stocks and electric vehicle companies like Tesla (TSLA). I do not invest in mining companies because of environmental concerns, and I do not invest in “story” stocks like EV manufacturers because I like to focus on “boring” stocks that benefit from the same trends, but not everyone is talking about.
It’s much easier to get an edge in your investment analysis when you are one of the few investors paying attention.
DISCLOSURE: Long CVA, UMICF.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
I’m puzzled about CVA, which has a P/E ratio of 341. Perhaps there is a lot of growth expected? Yet, the forward P/E I see listed is 67.
Think of CVA like a yeildco. High depreciation reduces GAAP earnings, but the company still has high cash flow for paying dividends, paying down debt, and investing.