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4 Pollution Control Stocks With Solid Earnings Growth Potential

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The Zacks Pollution Control industry has been benefiting from rise in pollution-related health concerns, efforts to adhere to pollution-related national and international norms by industries, and urbanization in several countries. Healthy shale drilling activities and increase in economic activities are expected to prove beneficial for the industry. Industry players like Donaldson Company, Inc. (DCI - Free Report) , Tetra Tech, Inc. (TTEK - Free Report) , Energy Recovery, Inc. (ERII - Free Report) and Heritage-Crystal Clean, Inc. (HCCI - Free Report) are poised to capitalize on the opportunities. However, increasing preference for alternative fuels and high costs related to frequent upgrade of products have marred the outlook of the industry players.

About the Industry

The Zacks Pollution Control industry comprises companies that are 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 and improving customer and employee experience as well as supply-chain modernization programs.

Trends Shaping the Future of the Pollution Control Industry

Stringent Government Regulations: The industry participants have been witnessing strong demand for pollution abatement technologies and services across manufacturing plants, owing to their adherence toward industrial regulatory compliances. For instance, industry players continue to market pollution abatement technologies in several European countries successfully, owing to the European Union's Industrial Emissions Directive in BAT Reference Documents. Surge in global demand for medical and pharmaceutical waste management services amid the pandemic is also boosting prospects of some of the industry participants engaged in providing these services.

Industrialization in Developing Countries: Increase in environmental management programs coupled with higher infrastructure build up and rapid urbanization in several developing countries is driving demand for pollution control equipment. Few industry players including Tetra Tech have been benefiting from the increase in requirement for consulting and engineering services that focuses on water, environment, sustainable infrastructure, energy, and resource management. The need for engineering and assessment services in disaster-related work also helps in creating a solid demand environment for the industry participants.

Existing Woes:  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, is curbing demand for pollution control products and services. The requirement of investing frequently to upgrade products and services, adhering to the guidelines of the pollution control boards in several countries often hurt the margins and profitability of industry participants. Shortage of skilled workers in the United States is also a persistent concern.

Zacks Industry Rank Indicates Solid 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 #108, which places it at the top 43% 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 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 with this group's earnings growth potential. The industry’s earnings estimates for 2021 have increased 4.1% 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 & Sector

The Zacks Pollution Control industry has underperformed both the S&P 500 and its sector in the past year. The stocks in this industry have collectively gained 34.4%, whereas the S&P 500 has moved up 37.1%. The Zacks Industrial Products sector has rallied 35.2% 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 37.58X compared with the S&P 500’s 25X. It is also trading above the sector’s forward 12-month P/E of 24.82X.

Over the past five years, the industry has traded as high as 38.14X and as low as 20.41X, with the median of 26.14X, 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 seem to be well-positioned to capitalize on the opportunities present in the industry.

Donaldson: Headquartered in Bloomington, MN, the company is engaged in manufacturing and selling of filtration systems and replacement parts across the world. The company seems well-positioned to benefit from strength in its on-road, off-road and aftermarket businesses, solid product offerings, healthy backlog and a diversified business structure in the quarters ahead. For fiscal 2021 (ended July 2021, results are awaited), the company expects sales to increase 9-11% year over year, up from 5-8% mentioned earlier. However, the pandemic-led challenges to its businesses, especially commercial aerospace, are concerning.

The Zacks Rank #3 (Hold) company’s shares have gained 30.4% in the past year. It surpassed earnings estimates in each of the trailing four quarters, with the earnings surprise being 9.02%, on average. The company’s earnings estimates have increased 0.4% for fiscal 2021, and the same for fiscal 2022 (ending July 2022) has gone up 1.5% in the past 60 days.

Price and Surprise: DCI

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 in its businesses. Also, its strong backlog level, which was $3,249.9 million, exiting third-quarter fiscal 2021 (ended Jun 27, 2021) will likely be beneficial. However, the company has been dealing with high costs and expenses, which might affect its margins and profitability.

The company’s shares have surged 46.5% in the past year. It surpassed earnings estimates in each of the last four quarters. It delivered a trailing four-quarter earnings surprise of 12.32%, on average. Although the Zacks Consensus Estimate for the company’s bottom line has been stable for fiscal 2021 (ending September 2021), it indicates growth of 12% on a year-over-year basis. The consensus estimate for fiscal 2022 (ending September 2022) has increased 0.3% in the past 60 days.

Price and Surprise: TTEK

Energy Recovery: Based in San Leandro, CA, this company is a leading global developer and manufacturer of highly-efficient energy recovery devices utilized in the water desalination industry. It stands to gain from strength in its desalination business, a solid pipeline of projects as well as its focus on new product innovations in the quarters ahead. The Zacks Rank #2 (Buy) company’s focus on manufacturing efficiencies, cost discipline and mix normalization is anticipated to drive profitability and margins. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company’s shares have gained 133.1% in the past year. It surpassed earnings estimates in each of the trailing four quarters, with the earnings surprise being 150.83%, on average. The company’s earnings estimates have increased 10% for 2021, while the same for 2022 has been stable in the past 60 days.

Price and Surprise: ERII

Heritage-Crystal Clean: Based in Elgin, IL, the company offers parts cleaning as well as hazardous and non-hazardous waste services to small and mid-sized customers in North America. The company stands to benefit from strength in its containerized waste, antifreeze and vacuum services businesses. Also, recovery in the oil re-refining end market is likely to be advantageous. However, the pandemic-led challenges on its businesses remains concerning.

The Zacks Rank #3 company’s shares have rallied 80% in the past year. It surpassed earnings estimates in each of the last four quarters. It delivered a trailing four-quarter earnings surprise of 108.81%, on average. The company’s earnings estimates have increased 34.9% for 2021, while that for 2022 has been stable in the past 60 days.

Price and Surprise: HCCI