Description

I believe Veolia offers an extremely attractive investment opportunity in a secularly attractive business that derives ~80% of its earnings from waste and water management (sectors where companies in the US trade at 25-30x earnings) for 12.5x fwd earnings and ~4.5% dividend yield. While the multiple I believe is far too low, the stated 10% net income + 4.5% dividend growth will yield a very satisfactory mid-teens IRR absent a multiple rerate. While there is no clear rerate catalyst, I believe now is an opportunistic time to invest in Veolia as 1) French elections have caused the stock to sell off (but is unlikely to have any meaningful impact to business performance), 2) a likely cyclical recovery in Europe and 3) potential USD weakening (particularly if Trump/Vance win the White House as looks increasingly likely).

Business Overview

Veolia is based in France and is conglomerate that focuses on 1) Water Management, 2) Waste Management and 3) Energy. Despite being based in France, only 20% of EBITDA comes from the country. While Veolia has above average complexity, the key theme is that 85% of their business is macro immune and secularly growing GDP+ businesses. The underlying megatrends of the circular economy, environmental protection/clean drinking water and decarbonization permeate through all the company’s operations. 

• Water (~50% of EBITDA) – Veolia is the largest municipal nonregulated operator and the third largest US municipal regulated player. They also derive 10% of EBITDA from Water Technologies focused on advanced water treatment that is a double digit, secular grower.

• Waste (~30% of EBITDA) – Solid waste makes up 2/3 of segment EBITDA with Hazardous waste 1/3. While both segments will see GDP+ growth, hazardous waste will enjoy double digit growth in years to come.

• Energy (~20% of EBITDA) – While a lower multiple business than the other segments. Power is currently undergoing a renaissance in the US with companies like VST/CEG/TLNE among the best stock market performers as the power demands on AI are reversing a decade of anemic power growth.

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Growth Algo

Veolia hosted an investor day in February 2020 and subsequently updated their strategic plan in February 2024 post their acquisition of Suez. The company is now guiding to faster net income growth (10% vs 8%), an growing ROIC (from 8% to 9-10%) and an increased cost cutting/synergy opportunity with Suez (worth ~3% annually to net income growth). Additionally, the company guiding to three “booster” segments to provide 70% of the organic growth. Those segments are water technologies, hazardous waste and energy efficiency. Given peer performance in these spaces, I view the organic growth profile of this the business as very credible. 

Valuation

Veolia is obviously a very cheap stock. 4.5% dividend yield and 13x forward earnings for a business that should grow GDP+ over time with 70+% of the business very macro resilient is cheap without regard to comps. The stock is also cheap relative to itself despite its improved earnings algo and business quality improvement. Business has averaged a PE of 15x since 2014 vs its 12.5x multiple today. 

Veolia is also blessed with a “beautiful comp group.” BAML lists their view of the comps below and except for some of the environmental comps, for 80% of the business almost every stock on the list trades at 25x earnings or higher.

Catalysts

In terms of catalyst, someone on the MCD thread said it best. In my PA, I look for companies where I can make a double digit return without much help from the market. Here, you have a business where the dividend+EPS growth should be around 15%, comps trade at double the multiple of Veolia and the trends in the business are good. However, there are two potential positive catalysts around the stock.

French Elections – Firstly, I believe just generally the French elections are a nonevent as no party has power in the National Assembly (so I own a variety of French stocks in addition to Veolia such as Edenred and Total). However, Veolia is particularly indifferent toward French politics as most of Veolia’s business is regulated at the municipal level. Additionally, despite its French HQ, France only makes up ~20% of Veolia’s business with business growth targeted away from Europe.

Macro- I personally believe Europe is in the early stages of a macro recovery and the dollar is set for a period of weakness. You can see the PMIs below. While Veolia is mostly macro immune, a recovering Europe should help sentiment and drive a higher multiple for any value-y European stock such as Veolia.

Catalyst

French Elections are a nonevent

European Macro Recovery

Business Compounding

USD Weakness (for US investors)