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Why This Utility's Stock Rocketed Higher in the Last Days of October

What happened

Shares of hybrid trash collector/power company Covanta Holding Corp (NYSE: CVA) were trailing the utility group through most of October. In fact, the stock was only up around 1% when investor sentiment changed abruptly in the last few days of the month. When all was said and done, Covanta ended the month up 8.4%, more than doubling the Utilities Select Sector SPDR ETF's (NYSEMKT: XLU) gain of 3.9%. The big jump came after earnings were announced on Oct. 26.

So what

At first glance Covanta earnings were less than exciting. For example, while third quarter revenues were modestly higher year over year, net income and adjusted EBITDA were both lower. Adjusted earnings of $0.12 a share, meanwhile, were lower year over year by $0.04. Not great, but certainly not horrible in what has turned out to be tough year (see below). Alone, however, those numbers wouldn't likely have led to the shares' notable outperformance.   

Image source: Getty Images.

The far more exciting news was the completion of a new trash powered electric plant in Dublin, Ireland. The plant has been in the works since around 2007, with construction commencing in late 2014. There was a disruption in the project in June when improperly installed gaskets led to a lime-ash release that sent 11 workers to the hospital. There was already local opposition to the project, so there was some concern that this accident would materially delay the plant's long-awaited opening. Third quarter earnings proved that this was not the case.   

There was also a positive update provided for the company's Fairfax facility, which had been shut down due to a massive fire earlier in the year. At this point Covanta expects to have this plant up and running again by the end of 2017. That means it would be contributing to results again in 2018. Taken together, positive news at these two plants removed notable business headwinds facing this hybrid trash hauler/power company.   

Now what

The third quarter earnings release made it clear that Covanta is finally getting itself back on track after facing some worrisome headwinds. In fact, management reaffirmed its full-year guidance for 2017. And while it's too soon for 2018 guidance, at least some of Covanta's biggest issues are either behind it or soon to be in the rear view mirror. That suggests that next year could be a good one relative to 2017. With a 6.4% yield, more aggressive investors might find a deep dive here well worth the effort.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.