Despite Risks, Covanta's Path To Improvement Has Become Clear

Accordingly, the firm upgraded the shares of the company from Market Perform to Outperform and raised its price target to $17.

Covanta is involved in processing energy from waste, which is an attractive environmental solution.

2Q Mostly Above Expectations

Analyst Jeffrey Silber noted that second-quarter revenues and adjusted EBITDA exceeded expectations, with waste and services revenue growth offsetting declines in energy and recycle metals.

The analyst clarified that the revenue beat came despite a $15 million loss in revenues in its Fairfax facility due to a delay in return to service following a fire in February. Moreover, the analyst believes the year-over-year decline in free cash flow was more of a timing issue related to scheduled projects (see Silber's track record here).

The analyst also noted that the company reaffirmed its 2017 guidance that calls for adjusted EBITDA of $400 million to $440 million and free cash flow of $100 million to $150 million. The management adjusted its segment revenue guidance for the Fairfax impact, the firm added.

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Dublin Facility On Track

BMO Capital Markets pointed to the management's comment that the timeline of the Dublin facility remains on track, with commercial operations expected to start by the second quarter of 2017. This is despite concerns that a recent incident could delay the start of commercial operations.

Even with future delays, the firm feels the facility will yield incremental benefits in 2018.

"Management reiterated that leverage will peak either in 2Q17 or 3Q17, with Dublin likely contributing incremental free cash flow thereafter," the firm added.

At the time of writing, shares of Covanta Holdings were up 2.95 percent at $14.82.