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4 Worthy Stocks in the Prospering Pollution Control Industry

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The Zacks Pollution Control industry has been benefiting from the rise in pollution-related health concerns, efforts to adhere to pollution-related national and international norms by industries, and urbanization in several countries. The increase in infrastructure development is expected to prove beneficial for the industry. Industry players like Tetra Tech, Inc. (TTEK - Free Report) , Donaldson Company, Inc. (DCI - Free Report) , Casella Waste Systems, Inc. (CWST - Free Report) and Heritage-Crystal Clean, Inc. (HCCI - Free Report) are poised to capitalize on the opportunities. However, increasing preference for alternative fuels, high costs related to frequent product upgrades, supply-chain woes, and high logistics and freight charges have marred the outlook of the industry players.

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. 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 as well as 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 been increasing investments in developing innovative technologies, improving customer and employee experience, and 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 to industrial regulatory compliance. For instance, industry players continue to successfully market pollution abatement technologies in several European countries due to the European Union's Industrial Emissions Directive in BAT Reference Documents. Healthy demand for medical and pharmaceutical waste-management services is also boosting the prospects of some industry participants.

Industrialization in Developing Countries: An increase in environmental management programs coupled with higher infrastructure build-up and rapid urbanization in several developing countries is driving the demand for pollution-control equipment. A few industry players, including Tetra Tech, have been benefiting from the increase in requirement for consulting and engineering services that focus on water, environment, sustainable infrastructure, energy, and resource management. The U.S. government's heightened focus on climate change, and water and environment are expected to create business opportunities for industry players.

Prevalent Demand and Cost Concerns: The industry has been dealing with the supply-chain crisis, which, in turn, has impacted the demand environment for some and inflated costs for some other players. Further, inflation in raw material prices, logistics problems, and rising freight charges are concerning for margins and profitability of the players.

Persistent Woes: The demand for pollution-control products and related services are adversely impacted by the increasing utilization of alternative fuels for power generation. The preference shift allows reducing the dependency on coal, a move quite visible in the United States and across the developed countries in Europe. 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. The shortage of skilled workers in the United States is another persistent concern.

Zacks Industry Rank Suggests Bright 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 #43, which places it at the top 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 healthy 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 2021 have increased 2.7% 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 and performed better than its sector in the past year. The stocks in the industry have collectively gained 19.9%, whereas the S&P 500 has risen 25.5%. The Zacks Industrial Products sector has rallied 9.5% over the same time frame.

One-Year Price Performance

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Pollution Control Industry's Valuation

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

The industry currently has a forward 12-month P/E of 29.05X compared with the S&P 500's 21.27X. It is also trading above the sector's forward 12-month P/E of 19.48X.

Over the past five years, the industry has traded as high as 31.29X and as low as 16.28X, with a median of 20.04X, as the chart below shows.

Pollution Control Industry's Valuation Versus S&P 500

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Pollution Control Industry's Valuation Versus Sector

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4 Promising Pollution Control Stocks to Consider

Below, we have discussed four stocks from the industry, which seem well-positioned to capitalize on the opportunities present in the industry.

Tetra Tech: The Pasadena, CA-based company is a leading provider of consulting, construction management, engineering, program management and technical services. The Zacks Rank #2 (Buy) company stands to benefit from business strength. Also, its strong backlog level, which was $3,480.3 million exiting fiscal 2021 (ended October 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 surged 39.7% 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 10.49%, on average. In the past 60 days, the Zacks Consensus Estimate for TTEK's earnings has increased 5.3% for fiscal 2022 (ending September 2022) and 1.6% for fiscal 2023 (ending September 2023).

Price and Surprise: TTEK

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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 off-road and aftermarket businesses, solid product offerings, healthy backlog and a diversified business structure in the quarters ahead. However, higher costs related to raw material, labor and freight are concerning.

The Zacks Rank #2 company's shares have increased 1.4% in the past year. It surpassed earnings estimates in three of the trailing four quarters, with the earnings surprise being 6.67%, on average. The company's earnings estimates have increased 1.9% for fiscal 2022 (ending July 2022), and the same for fiscal 2023 (ending July 2023) has gone up 2.1% in the past 60 days.

Price and Surprise: DCI

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Casella Waste: Based in Rutland, VT, the company provides solutions and services related to resource management. Its customer base includes residential, industrial, commercial and municipal clients. The company is poised to benefit from volume growth, solid operational execution, and synergistic gains from acquired assets. CWST presently sports a Zacks Rank #1 (Strong Buy).

You can see the complete list of today's Zacks #1 Rank stocks here.

Shares of Casella Waste have gained 34% in the past year. It surpassed earnings estimates in each of the trailing four quarters, the earnings surprise being 42.11%, on average. CWST's earnings estimates have increased 11.4% for 2021 and 11.1% for 2022 in the past 60 days.

Price and Surprise: CWST

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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 stands to benefit from strength in its oil and environmental services businesses. Synergistic gains from acquired assets are also beneficial. However, a rise in operating costs, and selling, general and administrative expenses are concerning. HCCI presently sports a Zacks Rank #1.

In the past year, Heritage-Crystal's shares have rallied 53.1%. The company surpassed earnings estimates in each of the last four quarters. It delivered a trailing four-quarter earnings surprise of 62.29%, on average. The company's earnings estimates have increased 9.7% for 2021 and 23.9% for 2022 in the past 60 days.

Price and Surprise: HCCI

Zacks Investment Research