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On Nov 25, we upgraded our recommendation on resource management and infrastructure company Tetra Tech Inc. (TTEK - Analyst Report) from Underperform to Neutral based on its improved prospects. Tetra Tech, which focuses on the lucrative pollution control market, also became a Zacks #2 Rank (Buy) stock shortly after reporting modest fourth quarter results.   

Why the Upgrade?

Fourth-quarter earnings of 39 cents per share (excluding one-time items) outpaced the Zacks Consensus Estimate of 36 cents. Total revenue in the reported quarter was down 2.9% to $698.4 million from $719.4 million in the prior-year period. Revenues, net of subcontractor costs, were $531.5 million compared with $536.3 million in the year-earlier quarter. However, revenues were well ahead of the Zacks Consensus Estimate of $519 million. Over the past four quarters, Tetra Tech has delivered a positive surprise in just one of the past four quarters, with an average beat of -3.8%.

Following the release of fourth quarter results, the Zacks Consensus Estimate for 2014 and 2015 have remained stagnant at $1.74 and $2.04 a share, respectively.

The company is shifting its focus from federal work, which contributed only about 25% of the total revenue in the fourth quarter. This shift is making the company less vulnerable to the instability in the federal government. The company’s maximum revenues are derived from its U.S. Commercial, U.S. International, U.S. state and local businesses that contributed about 75% of revenues in the last quarters of 2014. The company is likely to benefit further from the ongoing positive growth of these three sectors.

This apart, the company operates globally and serves public and private clients. As demand for water and natural resources increase, governments all round the world have started to take up environmentally sound initiatives. Tetra Tech is intending to expand its services in the industry to private clients, including Fortune 500 companies from utilities, manufacturing, and chemicals along with food and beverage sectors. Tetra Tech expects the revenues to increase from around $90 million to $500 million per annum, driven by increased organic and acquisitive investments. Hence, the industry looks modestly promising for the company’s growth.

Some other stocks worth considering in the pollution control sector include Fuel Tech Inc. (FTEK - Snapshot Report), having a Zacks Rank #1 (Strong Buy), and Perma-Fix Environmental Services Inc. (PESI - Snapshot Report) and Sharps Compliance Corp. (SMED - Snapshot Report), both carrying a Zacks Rank #2 (Buy).

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