Fifty years on, billions around the world now commemorate Earth Day, a day set aside with deliberate focus on the environment. At that first Earth Day, that focus was on roadside trash and junk cars, water fouled by chemical waste and air polluted by gas emissions. Things have not changed much. Humans remain filthy, ignorant and venal, spewing out waste in astounding volumes. However, the unfettered use of fossil fuels has added a new problem - one that is arguably more pressing than any environmental worry before. Global warming through the emission of greenhouse gases has led to a climate crisis of unprecedented proportions - erratic and dangerous weather events, rising seas and massive desertification.
Business has finally been forced to acknowledge the voracity of scientists’ warnings that continued emission of greenhouse gases could doom the planet. Of course, the abandonment of fossil fuels and the adoption of renewable energy alternatives cannot happen overnight. Corporations are now being held accountable for their greenhouse gas emissions. To prove their road maps to cleaner operations, many companies have chose to communicate to shareholders with the so-called ‘sustainability report’ or even the more encompassing ‘environment, sustainability and governance’ or ESG policy tome.
Several of the companies in the Crystal Equity Research coverage group have already published their versions of a sustainability report. The most recent to come across our desks is the first such report by Evoqua Water Technologies (AQUA: NYSE). It 2021 Sustainability Report was published to coincide with this year’s Earth Day. As a provider of water and waste water treatment solutions, Evoqua could benefit by a well-formulated environmental policy that could impress customers as well as shareholders.
The Evoqua report was prepared using guidance from the Global Reporting Initiative Standards formulated by the standard setting organization of the same name. Of course, GRI claims the most comprehensive reporting standards among the many frameworks that have popped up in the last few years. GRI is funded primarily by a mix of fees from membership fees, corporate engagements, services and events. The non-profit also gets as much as 40% of its budget from government and foundation grants. GRI claims ‘thousands’ of reporting entities across over one-hundred countries are using its standards.
Evoqua’s goals reveal
the company is giving itself plenty of time and latitude to make good on change. For example, there is a bow to water
conservation with the goal of recycling more water than is withdrawn from water
systems. A laudable goal. However, the company is taking well more than
a decade to get there. For an operation focused
on water clean-up solutions for its customers, it would seem Evoqua would want
to make the achievement of water recycling goals sooner rather than later.
Of course, water
conservation is not the only aspect of environmental responsibility. Evoqua management is also taking plenty of
time to reach zero net greenhouse gas emissions
- the year 2050. Even some heavy polluters are trying to reach
‘net zero’ emissions by 2040 or even 2035.
With the goal posts set so far down field, Evoqua can take its time
getting organized.
Evoqua’s sustainability
report pledges the adoption of science-based targets by next year in 2023. An entire year just to decide if science is a
good idea?
Perhaps Evoqua
leadership believes that since its products have a clearly positive
environmental impact, it is not an imperative for the company’s operations to
set ambitious sustainability targets. Evoqua
claims its products impact over 100 billion gallons of water every day. While this is an impressive number, it seems
that Evoqua’s competitive position could be enhanced by setting an example of zeal
for environmental responsibility.
In Evoqua’s case
there does not appear to a financial excuse for not being more aggressive in
cleaning up its operations. At the end
of December 2021, the company reported $162.1 million in cash in the bank. Working capital was $272.5 million, which
appears adequate to support the company’s revenue run rate near $1.5
billion. In the year 2021, the company generated
$191.8 million in operating cash flow, representing a sales-to-cash conversion
rate of 12.7%. The health cash situation
at Evoqua is probably one of the factors that gives management the confidence
to run with a bit of leverage. The
debt-to-equity ratio is 131.35.
If the company
needs to knock on the door at the capital markets, it has a good track record
in the debt market. AQUA currently
trades at a multiple of 42.9 times forward earnings in the year 2022. The generous multiple suggests a premium
priced stock and a low cost of equity capital.
If Earth Day teaches
nothing else, it is that respect for nature is an individual’s choice -
voluntary and without need for a push or shove from government
regulation. Unfortunately, the wrong
choice or a decision made too late will be summarily dealt with by nature, perhaps
in ways that are not very pleasant for humans.
Nature is dealing with recalcitrant humans by creating unfriendly circumstances
in our climate that could ultimately limit human populations. If humans are not willing to keep the environment
clean or practice conservation, nature will protect itself by reducing the
threat presented by human presence.
There is no time to waste, individuals and corporations like Evoqua must
step up with some speed to make change for the better environment -
especially those companies that have been ‘dragging the corporate feet’.
Neither the author of the Small Cap Strategist web
log, Crystal Equity Research nor its affiliates have a beneficial interest in
the companies mentioned herein.
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