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Bright Near-Term Outlook for Pollution Control Industry

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The Zacks Pollution Control industry comprises companies that provide innovative filtration systems, replacement parts, solutions for managing medical wastes, energy recovery devices and other products. Such products are primarily used in commercial, automotive repair, industrial, home healthcare, retail, pharmaceutical and hospitality end markets.

A few industry players provide solutions for dealing with industrial waste and commercial chemical products as well as technologies to tackle air pollution. Also, one of the companies provides services related to infrastructure, water, resource management, energy and others, to government and commercial clients. Some notable firms in the industry are Fuel Tech, Inc. (FTEK - Free Report) , Advanced Emissions Solutions, Inc. (ADES - Free Report) and CECO Environmental Corp. (CECE - Free Report) .

Here are the three major themes in the industry:

  • Growing pollution-related health concerns, increased infrastructure-related work in the United States, and government policies like environmental regulations are driving demand for pollution abatement technologies and services. Also, rising urbanization in emerging nations is boosting the global pollution control market. For instance, in the wake of the European Union's Industrial Emissions Directive in BREF, the companies belonging to this industry are marketing their technologies successfully in many European countries. Also, the need for engineering and assessment services in disaster-related work is creating a solid demand environment for pollution control equipment manufacturers.
     
  • Despite a slowdown in the worldwide oil demand, production volumes of oil and natural gas remain strong in the United States. This is driving the demand for pollution-control equipment. In addition, increased government spending, and the U.S. administration’s long-awaited infrastructure program are likely to expedite corporate investments in the days ahead.
     
  • Profitability of pollution-control equipment manufacturers are at risk on account of inflationary pressure caused by imposition of tariffs on import of various categories of goods. Amid this, the businesses are facing severe scarcity of skilled workforce owing to tight labor market in the United States. In addition, based on the guidelines of the pollution control boards in several countries, the industry participants invest frequently in the upgrade of products and services. However, such frequent investments often put weigh on the companies’ profitability and margins.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Pollution Control industry is a 11-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #43, which places it at the top 17% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping more faith in this group's earnings growth potential. It’s worth noting here that the industry’s earnings estimates for the current year have increased 0.7% since Aug 31.

We will highlight a few stocks that have the potential to outperform the industry based on strong earnings growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms S&P 500 & Sector

The Zacks Pollution Control industry has outperformed both its sector and the S&P 500 in the past year. While stocks in this industry have collectively gained 12.3%, the Zacks Industrial Products sector and the S&P 500 have rallied 5.5% and 10.5%, respectively.

One-Year Price Performance

Pollution Control Industry’s Valuation

EV/EBITDA ratio is commonly used for valuing pollution control stocks.

The industry currently has a trailing 12-month EV/EBITDA of 13.23X compared with the S&P 500’s 10.94X. It is trading below the sector’s trailing 12-month EV/EBITDA of 16.41X.

Over the past five years, the industry has traded as high as 13.23X, as low as 6.74X with the median of 9.52X, as the chart below shows.

Pollution Control Industry’s Valuation Versus S&P 500

Pollution Control Industry’s Valuation Versus Sector

Bottom Line

Solid demand for pollution-control equipment products and services is expected to continue benefiting the industry participants in the near term. The majority of the stocks within this industry currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold). We present four stocks that investors might be interested in.

A brief discussion on the chosen stocks is provided below:

Casella Waste Systems, Inc. (CWST - Free Report) : Headquartered in the Rutland, VT, the vertically-integrated solid waste services company has surged 44% over the past year. The Zacks Consensus Estimate for current-year earnings has moved up 1.2% to 84 cents over the past 30 days. The stock currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: CWST

Sharps Compliance Corp. (SMED - Free Report) : This Houston, TX-based company has gained 25.4% over the past year. The Zacks Consensus Estimate for fiscal 2020 (ending June 2020) earnings has remained stable at 6 cents in the past 30 days. The stock currently sports a Zacks Rank #1.

Price and Consensus: SMED

Energy Recovery, Inc. (ERII - Free Report) : This San Leandro, CA-based company has returned 4% over the past year. The Zacks Consensus Estimate for current-year earnings has increased 33.3% to 16 cents in the past 30 days. The stock currently has a Zacks Rank #2.

Price and Consensus: ERI

Tetra Tech, Inc. (TTEK - Free Report) : This Pasadena, CA-based company currently carries a Zacks Rank #3. Over the past year, the stock has gained 32.3%. The Zacks Consensus Estimate for fiscal 2020 (ended September 2020) earnings has remained stable at $3.44 over the past 60 days.

Price and Consensus: TTEK

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