Shares of Covanta Holding (CVA) have been strong performers lately, with the stock up 21.2% over the past month. The stock hit a new 52-week high of $17.76 in the previous session. Covanta Holding has gained 34.4% since the start of the year compared to the 29% move for the Zacks Oils-Energy sector and the 20.7% return for the Zacks Alternative Energy - Other industry.
What's Driving the Outperformance?
The stock has an impressive record of positive earnings surprises, as it hasn't missed our earnings consensus estimate in any of the last four quarters. In its last earnings report on April 29, 2021, Covanta reported EPS of $0.01 versus consensus estimate of $-0.17.
For the current fiscal year, Covanta is expected to post earnings of $0.21 per share on $2.02 billion in revenues. This represents a 200% change in EPS on a 5.89% change in revenues. For the next fiscal year, the company is expected to earn $0.22 per share on $2.04 billion in revenues. This represents a year-over-year change of 1.19% and 1.18%, respectively.
Covanta may be at a 52-week high right now, but what might the future hold for the stock? A key aspect of this question is taking a look at valuation metrics in order to determine if the company is due for a pullback from this level.
On this front, we can look at the Zacks Style Scores, as these give investors a variety of ways to comb through stocks (beyond looking at the Zacks Rank of a security). These styles are represented by grades running from A to F in the categories of Value, Growth, and Momentum, while there is a combined VGM Score as well. The idea behind the style scores is to help investors pick the most appropriate Zacks Rank stocks based on their individual investment style.
Covanta has a Value Score of C. The stock's Growth and Momentum Scores are A and C, respectively, giving the company a VGM Score of B.
In terms of its value breakdown, the stock currently trades at 83X current fiscal year EPS estimates. On a trailing cash flow basis, the stock currently trades at 11.6X versus its peer group's average of 11.6X. This isn't enough to put the company in the top echelon of all stocks we cover from a value perspective.
We also need to look at the Zacks Rank for the stock, as this supersedes any trend on the style score front. Fortunately, Covanta currently has a Zacks Rank of #2 (Buy) thanks to rising earnings estimates.
Since we recommend that investors select stocks carrying Zacks Rank of 1 (Strong Buy) or 2 (Buy) and Style Scores of A or B, it looks as if Covanta passes the test. Thus, it seems as though Covanta shares could have potential in the weeks and months to come.
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