Buy, Sell, or Hold: Veolia Environnement

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Veolia Environnement (NYS: VE) today, and see why you might want to buy, sell, or hold it.

Veolia is an environmental services company with a market capitalization of about $5.5 billion. Among other things, it treats water, designs and builds water infrastructure items, collects waste, treats polluted soil, and manages heating and cooling networks. Over the past year, its stock is down about 35%, leading some to steer clear, while others wonder whether it's now a bargain.

Buy
One reason to consider buying into Veolia is its business: We'll always need water, and it will often have to be treated. We'll always be producing waste that needs to be collected. We'll always be heating or cooling various spaces. You get the picture.


Another reason is the stock's fetching dividend, which recently yielded 7.4%. That's down some, though, from recent levels. Whereas the company paid out 1.21 euro per year in dividends in 2009 and 2010, it paid out just $0.70 euro in 2011. Still, 7.4% or thereabouts is a hefty payout, and even if it's cut further, it may remain attractive compared with alternatives. For the record, management plans to keep the current dividend level for the next two years.

Meanwhile, in the first half of 2012, its revenue grew instead of shrinking, though just by 3.4%. Its operating loss per share, at $0.23, was far lower than the year-earlier's loss of $1.40. So Veolia appears to be moving in the right direction. Its energy services division experienced the strongest growth, outstripping water and environmental services, due to higher energy prices. Looking ahead, management expects organic revenue growth of about 3% annually, and cash flows from operations near 5%.

Sell
One reason to consider selling Veolia is its debt load, which recently topped $14 billion. The company has noticed that little problem, though, and has been addressing it with plans to sell off about $6 billion worth of businesses and assets (and possibly more than that). It recently sold its U.S. waste business (but not its hazardous waste and industrial services businesses) to Highstar Capital for $1.9 billion. The U.S. waste-removal business is dominated by Waste Management (NYS: WM) and Republic Services (NYS: RSG) and to a lesser degree by Waste Connections and Progressive Waste Solutions. The entire industry has suffered lately, partly due to the sluggish economy generating less waste. Higher gas prices and low commodity prices have also had an impact.

Veolia selling off businesses can be viewed as a good thing, generating needed capital. It can also help a company to focus more on higher-margin businesses, while jettisoning lower-margin ones. But when companies streamline in this way, they can also end up cutting off some of their capacity for growth.

Another problem for the company is location, location, location. It's a global enterprise, but it is based in Europe and does much business there, where many countries are ailing. There and even in the United States, with national and local governments financially pressured, spending on water treatment and waste has been reined in when possible. It's not always possible, though, and some spending is simply being postponed.

Hold (off)
Given the reasons to buy or sell Veolia, it's not unreasonable to decide to just hold off. You might want to wait for conditions in Europe to improve, for example, or for Veolia to get its debt load down considerably.

You might also take a look at other companies in the promising water business. Heckmann (NYS: HEK) , for example, is a small company with a particular specialty -- serving oil and gas drillers, including those employing controversial fracking procedures. Its revenue has been exploding, more than doubling in the last quarter. Aqua America (NYS: WTR) , meanwhile, enjoying near-monopoly status in many regions where it does business, is also delivering water to energy drillers.

The verdict
I actually own shares of Veolia, though I'm underwater on them at the moment. I think that overall, it has a lot to recommend it and it may well perform spectacularly in the coming years. Everyone's investment calculations are different, though, so do your own digging and see what you think. Remember that there are plenty of compelling stocks out there.

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The article Buy, Sell, or Hold: Veolia Environnement originally appeared on Fool.com.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Veolia Environnement, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Waste Management and Heckmann. Motley Fool newsletter services have recommended buying shares of Republic Services, Waste Management, Veolia Environnement, and Aqua America. Motley Fool newsletter services have recommended writing covered calls on Waste Management. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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