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4 Pollution Control Stocks to Escape COVID-19-Led Industry Weakness

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Rising preference for alternative fuels, a conservative capital budget for U.S. shale drillers and steep decline in global energy demand amid the coronavirus outbreak has marred the outlook of the Zacks Pollution Control industry. Also, innovation-led high costs and expenses as well as pandemic-related supply-chain issues are concerns for the industry participants.

However, the industry is benefiting from higher adoption of pollution-abatement technologies and services as well as efforts to adhere to pollution-related national and international norms, particularly in the emerging markets. Four companies, Donaldson Company, Inc. (DCI - Free Report) , Casella Waste Systems, Inc. (CWST - Free Report) , Energy Recovery, Inc. (ERII - Free Report) and Heritage-Crystal Clean, Inc. (HCCI - Free Report) are likely to perform well.

About the Industry

The Zacks Pollution Control industry includes 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 offer solutions to deal with industrial waste and commercial chemical products as well as technologies to tackle air pollution. Also, one of the companies delivers services related to infrastructure, water, resource management, energy, etc. to government and commercial clients.

What’s Shaping the Future of Pollution Control Industry

Low-Demand Environment: Growing utilization of alternative fuels for power generation in order to reduce dependency on coal, particularly in the United States and across developed countries in Europe are restraining demand for industrial emission-abatement products as well as technologies. Also, lower economic activities due to the coronavirus-led market downturn and introduction of fresh lockdown measures in several parts of the world have made near-term prospects of the industry players gloomy. For instance, companies like Tetra Tech, Inc. (TTEK - Free Report) expects that sluggish economic recovery and lockdowns in Australia and the U.K. due to the pandemic will affect its business from international clients in early part of fiscal 2021. Thanks to a conservative capital budget, U.S. shale drillers might be reluctant to increase rigs in the oil patches. Despite a partial recovery in the past few months, a relatively weak crude pricing scenario might too not prove favorable in the near-term for drilling activities in the shale resources. This is likely to put pressure on demand environment for pollution-control equipment manufacturers.

Costs Related to Investments on Product Updates: Based on the guidelines of the pollution control boards in several countries, the pollution-control equipment manufacturers are required to frequently update products and services. Such frequent investments often dent profitability of the companies. Also, the pandemic-induced supply-chain issues are weighing on the profitability of several industry participants. Further, shortage of skilled workers in the United States is a persistent concern for industry participants.

Favorable Trends: Stringent government regulations, increasing pollution-related health concerns and higher infrastructure-related work in the United States are favoring the providers of pollution-control equipment and services. Also, rising demand for pollution-abatement technologies in the emerging markets is encouraging for the industry. For instance, players from this industry continue to market pollution abatement technologies in several European countries successfully, owing to the European Union's Industrial Emissions Directive in BAT Reference Documents (“BREFs”). In addition, the need for engineering and assessment services in disaster-related work helps in creating a solid demand environment for the industry players.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Pollution Control industry is a 10-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #212, which places it at the bottom 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 bearish 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 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 with this group's earnings growth potential. Notably, the industry’s earnings estimates for the current year are 25.5% down from the year-ago period.

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 & Sector

The Zacks Pollution Control industry has underperformed both its sector and the S&P 500 in the past year. While stocks in this industry have collectively gained 15%, the S&P 500 has moved up 16%. The Zacks Industrial Products sector has increased 19.6% 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 28.36X compared with the S&P 500’s 22.25X. It is also trading above the sector’s forward 12-month P/E of 23.25X.

Over the past five years, the industry has traded as high as 28.36X and as low as 14.29X, with the median of 18.87X, 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 Out For

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

Donaldson: Based in Bloomington, MN, the company is engaged in manufacturing and selling filtration systems and replacement parts across the world. The company is likely to benefit from strength in its process filtration businesses. Going forward, the company expects to gain share in new and emerging markets while benefiting from stability across its manufacturing replacement parts business. Further, its focus on innovation, supply-chain optimization along with its diversified business structure, solid product offerings and growing e-commerce business are likely to be beneficial over time.

The Zacks Rank #2 company’s shares have declined 1.1% in the past year. However, the stock has surged 21.2% in the past six months. It surpassed earnings estimates thrice, while missing once in the trailing four quarters. Donaldson has trailing four-quarter earnings surprise of 11.96%, on average. Notably, the company’s earnings estimates have improved 1% for fiscal 2021 (ending Jul 31, 2021) and 1.3% for fiscal 2022 (ending Jul 31, 2022) in the past 60 days.

Price and Consensus: DCI

Casella Waste Systems: Headquartered in Rutland, VT, the company provides resource management services in the areas of solid waste collection and disposal, recycling, transfer, as well as organics services primarily throughout the eastern portion of the United States and parts of Canada. In the quarters ahead, the company is poised to benefit from its strong customer base, solid demand environment in recycling business, acquired assets and focus on its operational efficiency. However, challenged end-market conditions amid the coronavirus pandemic are a concern for its near-term performance.

In the past year, the Zacks Rank #3 company’s shares have increased 35.3%. Notably, the company surpassed earnings estimates thrice, while meeting once in the last four quarters. It has trailing four-quarter earnings surprise of 156.37%, on average. In the past 60 days, the Zacks Consensus Estimate for the company’s earnings has increased 29.2% for 2020. Also, the consensus estimate for the company’s 2021 earnings has moved up 12.1%.

Price and Consensus: CWST

Energy Recovery: Headquartered in San Leandro, CA, this Zacks Rank #2 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.

The company’s shares have gained 23.1% in the past year. In the trailing four quarters, it beat earnings estimates thrice, while missing once. It has a trailing four-quarter earnings surprise of 239.58%, on average. Notably, the company’s earnings estimates have increased 16.7% for 2020 and 63.6% for 2021 in the past 60 days.

Price and Surprise: ERII

Heritage-Crystal Clean: Based in Elgin, IL, the company is engaged in offering parts cleaning, hazardous and non-hazardous waste services to small and mid-sized customers in North America. The company is likely to benefit from strength in its containerized waste, antifreeze and vacuum services businesses. However, the pandemic led market downturn is expected to affect its near-term performance.

Although, the Zacks Rank #3 company’s share price declined 30.2% over the past year, it has increased 19.5% in the past six months. It surpassed and missed earnings estimates twice, each in the last four quarters. It boasts an earnings surprise of 55.26%, on average, for the past four quarters. Notably, the company’s earnings estimates have improved from a loss of 26 cents to an earnings of 27 cents for 2020, while that for 2021 has increased 13.3% in the past 60 days.

Price and Surprise: HCCI

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