Veolia Putting Value On A Dirty Job

By Gregory S. Davis | October 31, 2008 AAA

Paris-based utility group Veolia Environnement SA (NYSE:VE) performs what may be considered a dirty job by some. Veolia operates water treatment and energy services for municipalities in key markets including the U.S., China and the U.K. Along with the basic need for clean water in Asian markets, the following basket of ratios will help investors mine for value in Veolia.

Identifying the Need
Parts of Veolia's work maybe dirty, but the need for its services is present and growing. Charitable donor advisory group Give2Asia listed water treatment as the primary need in regions of China hit hardest by earthquakes prior to the summer Olympics. In addition, the need for water treatment in China's growing cities is a palpable, but perhaps under acknowledged, need.

Valuation
Veolia offers value investors a dream-like combination of low ratios, which also makes the stock look attractive.

Earnings Growth
With a PEG ratio below "1", at 0.83, Veolia is expected to have strong earnings growth over the next five years. Remember, the PEG ratio amounts to the money an investor is willing to pay for each dollar of earnings generated, divided by the expected earnings growth rate. Therefore, a forward P/E ratio of 7.17 suggests that investors are willing to pay $7.17 for each dollar of earnings. The approximate earnings growth rate for the next five years is 8.6%.

Discount to Revenue
Veolia also has a low price-to-sales ratio to compliment its low PEG. Because fuzzy math can be applied more easily to lower levels of financial statements, the P/S, which is related to revenue and tops the income statement, is a good ratio to use. A P/S ratio of "1" means investors pay $1 for each $1 of revenue generated. The P/S formula is the current stock price divided by revenue per share for the trailing twelve months. With a P/S ratio below "1", at 0.22, Veolia investors pay an estimated 22 cents for each $1 of revenue generated, signaling the current discount available to investors. (To learn more about using ratios to value stocks, read Use Price-To-Sales Ratios To Value Stocks.)

Close to Book
The price-to-book ratio measures how a stock's price is trading in relation to the actual breakup value of a company. A tech company like Google (Nasdaq:GOOG) has a P/B ratio of 3.76, which means its $300+ stock price is well above its $87.61 book value. Veolia has a P/B ratio of 1.04, which indicates that the stock is trading just north of its book value. Trading near or below book value can be another sign of value. (For more reading on book value, check out Value by the Book.)

Other foreign water utilities with similar signs of value include Cayman Islands-based Consolidated Water Company (Nasdaq:CWCO) and Brazil-based Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE:SBS).

Final Thoughts
Along with its list value principles, Veolia offers a dividend. Dirty jobs often go unnoticed to end users of the final product, but investors should take notice of these purifiers of perhaps the world's most important commodity.

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