Is Veolia Environnement a Dirty Word?

Sometimes Wall Street offers only tepid enthusiasm for companies that investors think are hot. It's no different on Motley Fool CAPS when the 180,000 members collectively bestow top honors on a stock, only to see the pros give it the thumbs-down.

That's the situation with environmental management services specialist Veolia Environnement (NYS: VE) . Almost 1,100 CAPS members have weighed in on its prospects, and 96% of them see it outperforming the broad market averages. It has earned a top five-star rating -- yet more than half the analysts rating it believe it will stumble.

So who has it right? The professional class of analysts, sitting in their paneled offices smoking stogies, or a Motley community of investors pooling their best thoughts for others to share? We think we know who will come out ahead. How about you?

Of course, as much as we love our CAPS community, you shouldn't buy a company just because it has garnered top ratings. And don't sell it just because Wall Street says to, either. Investing requires further diligence on your part, so use a stock's CAPS rating as a launching pad for your own research.

Drowning in debt
Based in France, Veolia is the world's largest waste and water utility, but it's transforming itself to focus more on water and less on the waste. As the economies of European nations falter under the weight of excessive spending and debt, the fallout has landed squarely on Veolia. Particularly as Italy and France deteriorate, Veolia realized it would have to cut more and spend less to turn itself around (something the sovereign nations could stand to emulate).

But debt isn't foreign to Veolia, as it carries some $14.6 billion worth of net debt and is shedding businesses around the globe to reduce the burden. It plans to divest more than $6 billion in assets to pay down its obligations. Recently it sold its waste management business in the U.S., where it competed against Waste Management (NYS: WM) and Republic Services (NYS: RSG) , and its energy services unit Dalkia is so fraught with problems that management doubts it will remain part of the company much longer.

Veolia also sold its regulated water assets in the U.K. and is planning to back out of its French public transportation joint venture. In total, the environmental-services specialist plans to jettison 29 business lines in 22 countries.

Water, water, everywhere
In the sci-fi classic Dune, the desert planet of Arrakis is so devoid of water that its inhabitants not only wear body suits that recycle their sweat, but they recycle water from the dead. To spit upon meeting someone is considered an honorable introduction. Things haven't become so dire here on Earth, but water remains an important enough commodity that even with the divestiture of its U.K. water assets, Veolia is becoming a more water-centric operation.

Here in the U.S., the premier water utility is Aqua America (NYS: WTR) , which the analysts at Zacks note has near-monopoly status where it operates and should benefit from the sizzling summer weather in the East. It recently entered into a joint venture to supply water to drilling operations in the Marcellus shale region. Heckmann (NYS: HEK) has also specialized in providing water to oil and gas drillers, but the fracking procedure that utilizes the water has come under attack, and the disposal of the water and fluids is gaining greater environmental scrutiny.

Yet water remains perhaps the most important commodity, and Veolia's greater concentration on it bodes well for the turnaround. It completed a water treatment facility in Tampa last year that was the largest-ever "design, build, operate" project in the U.S. and a new addition to the 650 communities Veolia currently services here.

Wall Street is still feeling around to understand where the company will end up; over the past 30 days, the two analysts raised their current-year earnings estimates by almost 13%, though they reduced next year's estimates by 5.5%. They expect Veolia to earn $0.88 per share in 2012, up from prior estimates of $0.78, while next year they see per-share profit growing to $1.20, down from $1.27.

Sailing on smooth waters
Once all the cost-cutting and asset sales are complete -- which Veolia figures will be in 2013 -- it projects it should be able to grow revenue organically by 3% annually, while operating cash flow should rise by 5% annually.

Undoubtedly, there are a lot of moving parts with Veolia Environnement that make it difficult to analyze on an apples-to-apples basis, but it certainly looks like it's positioning itself to be in the sweet spot of the industry. Once the waters calm, I foresee significant outperformance, so I'm rating it to outperform on CAPS, but tell me in the comments box below whether you think the water services behemoth will sink or swim.

What's wrong with that?
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