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Newalta Corp: One to Watch this Reporting Season

Do you ever wonder where the old oil that’s drained from your car goes?  Well, especially if you live in Vancouver, Newalta has the answer.

This company can do things that no other company in the country can do and is poised for a great long-term run.

The waste management and recovery industry is an industry that should experience healthy growth in coming years due to the continuing growth in environmental standards.   This is an industry that is experiencing secular growth, and Newalta Inc. (TSX: NAL) has an estimated 35% market share in Canada.  (For more background on Newalta, check out our profile in a recent edition of Take Stock)

Upcoming quarter

Newalta will be reporting second quarter results on Wednesday.  The consensus earnings estimate for the quarter is $0.17 versus $0.10 in the same quarter last year.  This represents a 70% growth rate in EPS.

When the company released its first quarter results in May, they were disappointing, as they were negatively impacted by weak commodity prices and reduced drilling.  Revenue increased 2.9% while EBITDA declined 23% due to lower activity and higher SG&A expenses.

On the positive side, the company increased its dividend last quarter by 10% to $0.44 per share.  This leaves its current yield at 3.1% and demonstrates management’s confidence in future growth and stability. Furthermore, management has committed to focus on return on capital and their outlook was positive.

Newalta is trading at a price earnings ratio of 16 times 2013 consensus earnings, but only 13 times 2014 consensus estimates.  The stock is not currently placing much value on the company’s substantial future opportunities.

Outlook

At the time of the first quarter release, management anticipated strong increases in year over year performance in the second half as the returns from recent capital investments begin to be realized.   With the difficult drilling environment we’ve had in the second quarter, this short term outlook may have been too optimistic.  However, this does not change the long term outlook.  There is good visibility on the company’s pipeline of organic growth capital projects, extending well into 2014 and capital spending will be prioritized towards longer term contracts that deliver the highest returns.

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