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4 Pollution Control Stocks to Watch Amid Industry Challenges

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Rising preference for alternative fuels, high costs related to frequent product upgrades, supply-chain woes and increased logistics and freight charges have marred the outlook of the Zacks Pollution Control industry. Also, the shortage of skilled labor in the United States has been a persistent concern for the industry participants.

However, the industry is benefiting from the growing pollution-related health concerns and efforts to adhere to pollution-related national and international norms, particularly in the emerging markets. Four companies, Tetra Tech, Inc. (TTEK - Free Report) , Donaldson Company, Inc. (DCI - Free Report) , Energy Recovery, Inc. (ERII - Free Report) and Heritage-Crystal Clean, Inc. , are likely to perform well.

About the Industry

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. The 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 and technologies to tackle air pollution. One of the companies also delivers services related to infrastructure, water, resource management, energy and others to government and commercial clients. The companies have increased investments in developing innovative technologies, improving customer and employee experience and supply-chain modernization programs.

What's Shaping the Future of Pollution Control Industry

Growing Popularity of Alternative Fuels: Higher utilization of alternative fuels for power generation to reduce dependency on coal in the United States and other developed countries across the world is restraining demand for industrial emission-abatement products and technologies. Factors like supportive government policies related to renewable energy, increase in renewable investments, reduction in the overall cost of generating renewable electricity and rapid adoption of electric vehicles (EV) have made the prospects of the industry players gloomy. Also, the introduction of fresh lockdown measures owing to the rise in COVID-19 cases in a few parts of Asia might put pressure on the demand environment for pollution-control equipment manufacturers.

Costs Related to Investments in Product Updates: Based on the guidelines of the pollution control boards in several countries, pollution-control equipment manufacturers are required to frequently update products and services. Such frequent investments often hurt the margins and profitability of industry participants. Also, the persistent supply-chain issues, inflation in raw material prices, logistics problems and rising freight charges are weighing on the profitability of several industry participants. The shortage of skilled workers in the United States has also been a persistent concern for the industry.

Stringent Government Regulations: Strong demand for pollution abatement technologies and services across manufacturing plants, owing to their adherence to industrial regulatory compliances, has been benefiting the industry participants. Thanks to the European Union's Industrial Emissions Directive in BAT Reference Documents (BREFs), several industry players continue to market pollution abatement technologies in European countries successfully. A surge in global demand for medical, pharmaceutical and hazardous waste management services is also boosting the prospects of some industry participants engaged in providing these services.

Industrialization: An increase in environmental management programs along with infrastructure development and rapid urbanization is creating a solid demand environment for the industry participants. Few industry players, including Tetra Tech, have been gaining from the increase in requirement for consulting and engineering services that focus on water, environment, sustainable infrastructure, energy and resource management.

Zacks Industry Rank Suggests Bleak Prospects

The Zacks Pollution Control industry is an 11-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #157, which places it at the bottom 38% 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 bearish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping less faith in this group's earnings growth potential. The industry's earnings estimates for 2022 have decreased 6.5% over the past year.

Before we discuss a few stocks from the industry, it's worth taking a look at the industry's shareholder returns and its current valuation.

Industry Underperforms S&P 500, Outperforms Sector

The Zacks Pollution Control industry has underperformed the S&P 500 but performed better than its sector in the past year. The stocks in the industry have collectively gained 1.4%, whereas the S&P 500 has risen 6.6%. The Zacks Industrial Products sector has declined 7.3% over the same time frame.

One-Year Price Performance

Pollution Control Industry's Valuation

Price/Earnings (P/E) ratio is commonly used for valuing pollution control stocks.

The industry currently has a forward 12-month P/E of 30.25X compared with the S&P 500’s 21.61X. It is also trading above the sector’s forward 12-month P/E of 21.28X.

Over the past five years, the industry has traded as high as 37.92X and as low as 20.29X, with a median of 26.36X, as the chart below shows.

Pollution Control Industry’s Valuation Versus S&P 500

Pollution Control Industry’s Valuation Versus Sector

4 Pollution Control Stocks to Watch

Below, we have discussed four stocks from the industry that possess the potential to sail through tough market conditions and have growth opportunities. The stocks carry a Zacks Rank #1 (Strong Buy), Zacks Rank #2 (Buy) or #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Tetra Tech: The Pasadena, CA-based company is a leading provider of consulting, construction management, engineering, program management and technical services. The Zacks Rank #3 company stands to benefit from strength across its businesses. Also, its strong backlog level, which was $3,448.3 million exiting first-quarter fiscal 2022 (ended December 2021), will likely be beneficial. However, the company has been dealing with high costs and expenses, which might affect its margins and profitability.

Shares of Tetra Tech have jumped 11.7% in the past year. The company surpassed earnings estimates in each of the last four quarters. It delivered a trailing four-quarter earnings surprise of 10.1%, on average. In the past 60 days, the Zacks Consensus Estimate for TTEK's earnings has been stable for both fiscal 2022 (ending September 2022) and fiscal 2023 (ending September 2023).

Price and Surprise: TTEK

Donaldson: Based in Bloomington, MN, the company is engaged in manufacturing and selling filtration systems and replacement parts worldwide. The company stands to benefit from its diversified business structure, strong product portfolio, focus on innovation and growth investments. Strength across its aerospace & defense, off-road and aftermarket businesses, along with supply-chain optimization and growing e-commerce business, is likely to be beneficial over time.

Although the Zacks Rank #2 company’s shares have declined 15.1% in the past year, it has gained 1.9% in the past month. It surpassed earnings estimates twice while missed and met estimates once each in the trailing four quarters. Donaldson pulled off a trailing four-quarter earnings surprise of 4.2%, on average. DCI’s earnings estimates have improved 0.7% for fiscal 2022 (ending Jul 31, 2022) and 2% for fiscal 2023 (ending Jul 31, 2023) in the past 60 days.

Price and Consensus: DCI

Energy Recovery: Headquartered in San Leandro, CA, this Zacks Rank #3 company is a leading global developer and manufacturer of highly-efficient energy recovery devices utilized in the water desalination industry. The company is poised to benefit from strength in its desalination business, new product introductions and a strong pipeline of projects in the quarters ahead. However, high costs and expenses, along with supply-chain constraints, might put pressure on its margins and profitability.

The company’s shares have lost 8.1% in the past year. However, it has gained 0.9% in the past month. It pulled off a trailing four-quarter earnings surprise of 113.3%, on average. ERII’s earnings estimates have been stable for both 2022 and 2023 in the past 60 days.

Price and Surprise: ERII

Heritage-Crystal: Based in Elgin, IL, HCCI offers parts cleaning as well as hazardous and non-hazardous waste services to small and mid-sized customers in North America. The company is poised to benefit from strength in its oil and environmental services businesses. Synergistic gains from acquired assets are also likely to be beneficial. However, high operating costs and selling, general and administrative expenses remain concerning. HCCI presently sports a Zacks Rank #1.

In the past year, Heritage-Crystal's shares have jumped 3.3%. The company surpassed earnings estimates in each of the last four quarters. It delivered a trailing four-quarter earnings surprise of 51.5%, on average. The company's earnings estimates have increased 13.1% for 2022 in the past 60 days.

Price and Surprise: HCCI



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