With rapid urbanization and concerns over pollution-related health risks, increasing demand for pollution control equipment should drive growth in the Zacks Pollution Control industry. Stringent government actions to curb air pollution and industrial emissions act as a tailwind to the industry. While the growing adoption of renewable sources of energy for power generation poses a challenge to the industry, governments across the globe focusing on climate-change issues emerge as a catalyst for growth.
Amid the buoyancy in the industry, companies like Tetra Tech, Inc. TTEK, Heritage-Crystal Clean, Inc HCCI, CECO Environmental Corp. CECO and Fuel Tech, Inc. FTEK are poised for growth.
About the Industry
The Zacks Pollution Control industry comprises companies engaged in providing innovative filtration systems, replacement parts, solutions for managing medical wastes, energy recovery devices and other products. These products are primarily used in commercial, automotive repair, industrial, home healthcare, retail, construction, pharmaceutical and hospitality end markets. A few industry participants offer solutions to deal with industrial waste and commercial chemical products as well as technologies to tackle air pollution. One of the companies also delivers services related to infrastructure, water, resource management, energy, etc., to government and commercial clients. These companies are enhancing investments in developing innovative technologies, improving customer and employee experience and enhancing supply-chain modernization programs.
3 Trends Shaping the Future of the Pollution Control Industry
Growing Demand for Air-Quality Control: With rapid industrialization in developing countries, the pollution-control companies stand to benefit from growing demand for air-quality control systems. Increasing awareness of reducing the health hazards of air pollution is driving demand for air-pollution control solutions. With power plants being a major source of harmful gas emissions, there is strong demand for air filters in the power generation industry. Growing concerns over environmental pollution and the need for government actions to curtail industrial emissions should foster growth of the industry players.
Stringent Government Regulations: Rising concerns over greenhouse gas emissions, ozone depletion and the destruction of ecosystem led countries worldwide to set strict emission standards and implement laws and regulations to curb the same. This should continue to drive demand for pollution-control equipment. The U.S. government's heightened focus on climate change is expected to create business opportunities for industry players. The European Union’s pollution prevention and control initiatives, based on the Best Available Techniques (BAT), should continue strengthening demand for pollution-abatement technologies in European countries.
Emergence of Alternative Sources of Energy: With the United States and other developed countries reducing their dependencies on fossil fuels and switching to renewable sources of energy for power generation and industrial activities, demand for industrial emission-abatement products and technologies is witnessing a setback. Automakers rapidly transitioning to electric vehicles as part of their sustainability initiatives are expected to dampen demand in the industry. Supply-chain constraints, and high costs of raw materials, labor and freight are other headwinds plaguing the industry. Pricing actions are providing some relief from inflationary pressures.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Pollution Control industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #25. This rank places it in the top 10% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bullish near-term prospects. 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. The industry’s earnings estimates for 2022 have increased 15.1% over the past year. The same for 2023 has increased by 17.9% since June-end.
Given the upbeat near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it is worth looking at the industry’s shareholder returns and its current valuation first.
Industry Outperforms S&P 500, Lags Sector
While the Zacks Pollution Control industry has outperformed the Zacks S&P 500 composite index over the past year, it has underperformed the broader Industrial Products sector.
Over this period, the industry has declined 14.7% compared with the broader sector and the S&P 500 Index’s 13.6% and 16.9% decrease, respectively.
One-Year Price Performance
Industry's Current Valuation
Based on the forward P/E (F12M), a commonly used multiple for valuing pollution control stocks, the industry is currently trading at 22.18X compared with the S&P 500’s 17.65. It is also above the sector’s P/E (F12) ratio of 16.61X.
Over the past five years, the industry has traded as high as 30.94X, as low as 16.08X and at the median of 21.84X, as the chart below shows:
4 Pollution Control Stocks to Buy
Below we discuss four stocks from the industry with solid growth opportunities. The stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Fuel Tech: FTEK develops technology for air-pollution control, and provides process optimization, water treatment and advanced engineering services. Higher orders in the Air Pollution Control business segment should drive Fuel Tech’s top line. Increased demand for power generation augurs well for FTEK’s prospects. The stock currently sports a Zacks Rank of 1.
The Zacks Consensus Estimate for Fuel Tech’s 2022 earnings has been revised 40% upward in the past 60 days. The consensus mark for FTEK’s 2023 earnings has moved a penny northward against a loss of a penny 60 days ago. Shares of FTEK have inched up 2.5% in the past six months.
Price and Consensus: FTEK
CECO Environmental: Headquartered in Dallas, TX, CECO Environmental is an environmentally-focused industrial company, serving diverse markets of industrial air, industrial water and energy transition. Strong orders and backlog levels are supporting CECO’s growth. Its strategic acquisitions to expand its capabilities in the industrial air and water platforms should bolster growth. CECO currently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for CECO Environmental’s 2022 earnings has been revised 15.9% upward in the past 60 days. The same for 2023 earnings has moved 19.5% north in the past 60 days. The stock has rallied 84.2% in the past six months.
Price and Consensus: CECO
Heritage-Crystal Clean: Based in Elgin, IL, Heritage-Crystal Clean provides hazardous and non-hazardous waste services to small and mid-sized manufacturers and other industrial businesses. Increased demand for services and acquired assets are aiding growth. Improved volumes and prices across all service lines are expected to boost HCCI’s top line. Strength in the oil business segment owing to higher base oil prices is also a key growth driver. The stock carries a Zacks Rank #2 at present.
The Zacks Consensus Estimate for Heritage-Crystal Clean’s 2022 earnings has been steady in the past 60 days. The same for 2023 earnings has been revised 13.3% upward in the past 60 days. Shares of HCCI have appreciated 13.1% in the past six months.
Price and Consensus: HCCI
Tetra Tech: Headquartered in Pasadena, CA, Tetra Tech provides consulting, construction management, engineering, program management and technical services. Strength in municipal and sustainable infrastructure are fueling growth. TTEK’s expansion of product lines and market presence through strategic acquisitions are encouraging. The buyouts of Piteau Associates and Axiom Data Science expanded its capabilities in advanced analytics for water management and geotechnical solutions, and advanced climate data analytics solutions. The stock is currently Zacks #2 Ranked.
The Zacks Consensus Estimate for Tetra Tech’s fiscal 2023 earnings has been revised 2.8% upward in the past 60 days. The same for fiscal 2024 has moved 4.1% north in the past 60 days. Shares of TTEK have gained 24.5% in the past six months.
Price and Consensus: TTEK
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