TXinvestor82 (28.52)

Veolia Environnement...what a mess!

September 23, 2011 – Comments (0) | RELATED TICKERS: VE

I took advantage of a fairly uneventful day at work today to partake in one of my favorite prescriptions to boredom:  stock analysis!

Today's subject was Veolia Environnement, who is the world's largest publicly-traded water company.  They have a $7 billion market cap and a recent share price of $13.70.  I took interest to Veolia after seeing its share price get obliterated over the past few months, which has resulted in a current double-digit dividend yield.  Also, James Early (a hero of mine) mentioned briefly on Motley Fool Money that the stock was on his watchlist.

Veolia operates in four segments.  The largest by far is Water Management, which does revenue of roughly 12.5 billion euro/yr (36% of total revs).  This is the foundation of Veolia and is the largest water management division in the world.  However, Veolia has been seeing declining revenue in wastewater for several years.  With many European countries (VE's customers) soaked in sovereign debt and in terrible financial shape, it's likely that we will see further revenue declines in the future.  Even if the revenues were to maintain stable, it would likely be at the sake of margins.  Veolia is abandoning its marine services business in the US after realizing it had committed accounting fraud between 2007-2009.  The impact to the overall numbers was nearly neglible..but SHEESH - what a mess!

It leads me into the next key risk, which is that Veolia is just getting too big for its own good.  The company is what I call a 'conglomerate mess' (it also provides waste management, energy, and transportation services) with assets that are impossible to quantify.  To that end, it wrote down its goodwill by 800 million euro last year, yet still sports 12.5 BILLION euro worth of goodwill and intangibles on its balance sheet.  That's a train wreck waiting to happen.

It's financials are plain-out disgusting.  Net margin of only 1.7% last year, and starting the first six months of 2011 with a net loss of 67.2 million (euro).  We all know that accounting can distort the picture sometimes, so I looked to the cash flow for confirmation.  Yep..negative free cash flow as well.  And to put the icing on the cake, 1/3 of the company's revenues are presently tied up in A/R.

Without surprise, the market hasn't been impressed with Veolia's performance either.  At today's prices, they are selling at a forward P/E of just under 9 and a P/B of only 0.7.  This suggests that the market believes there might be future goodwill writedowns in the future (which I agree with). 

The plummeting stock price has brought the forward dividend yield to 10.6%, which is extremely attractive if viewed in isolation and if it were to be sustainable.  But with a recent announcement of restructuring, uncertainty about the financial situation of many of its customers, and no sense of strategic direction, Veolia is clearly still in the toilet