April 11, 2008 - Covanta Holding Corp. (CVA-NYSE) has seen the light: There's more money in energy than insurance. Through several strategic acquisitions (including Covanta Energy), the former insurance-focused company has made itself a leader in the waste and energy services markets. The company owns or operates 51 energy generation facilities (41 in the US). It also collects municipal waste and uses it in about 30 waste-to-energy facilities around the world. CVA provides contract construction, maintenance, and operation services for water and wastewater systems in the US. Covanta Holding writes policies for automobile drivers through its National American Insurance Company of California subsidiary.

The stock went public in 2004 and showed earnings of 37 cents. The following years, the bottom line was 48 cents, 60 cents, 99 cents. This year, analysts predict $1.12 and $1.25 next. Over the next 5 years, they expect earnings to have an average annual growth rate of 18.5% while sales increase by 7.5%. Earnings for the final quarter of 2007 were more than 5 times the final quarter of 2006. For the full year, earnings were up 65% over 2006.

Back in 2005, the company borrowed $2 billion to expand operations. Paying off that debt is a high priority with $600 million of it gone and another $400 million targeted for payment by the end of the year. Since total debt reached $2.7 billion near the end of 2005, the company will still have a sizable percentage of its capital from debt after the pay downs.

There are two powerful forces converging to help CVA. The first is the limited landfill space remaining in the U.S. The need for converting waste to energy will only increase as less and less land is available to absorb all of it. The second is the waste-to-energy movement is gaining momentum as companies able to do it give a renewable energy source of power and a more productive way of waste disposal.

More numbers: Debt is 67% of capital. Current assets are 1.6 times current liabilities. Return on Equity is 14%. Chairman is Sam Zell, famous real estate investor, who owns a little over 15% of the company. There are no dividends. Net profit margin was 10.6% last year with expectations of 11.4% and 12.5% for the next 2.

Covanta is evolving and growing profits at the same time. While it started as an insurance company that acquired Covanta Energy in 2004, there is no doubt the future belongs to waste-to-energy efforts. The financial statement is leveraged with a little too much debt for conservative investors. But ones with higher tolerance for risk will find this an interesting stock with which to spend more time.

Company Web site: www.covantaholding.com

- Ted Allrich