With rapid urbanization and growing concerns among people regarding pollution-related health hazards, strong demand for pollution abatement products and technologies is driving the growth of the Zacks Pollution Control industry’s growth. Since air pollution is a major concern today, there is strong demand for air filtration systems. Government actions to reduce industrial emissions and implement laws and regulations for pollution control augur well for the industry participants. These factors point to a rosy outlook for the industry in the near term despite a setback from the growing adoption of alternative sources of energy in power generation and industrial activities.

Companies like Tetra Tech (TTEK Quick QuoteTTEK - Free Report) , Energy Recovery (ERII Quick QuoteERII - Free Report) and Vertex Energy are poised to benefit from the buoyancy in the industry.

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. 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, improving customer and employee experience and enhancing supply-chain modernization programs.

3 Trends Shaping the Future of the Pollution Control Industry

Growing Demand for Air-Quality Control: Rapid industrialization in developing countries is driving demand for air-quality control systems. This bodes well for the pollution control industry as a whole. There is growing demand for air filtration systems from the flourishing medical and pharmaceutical industries. Rising awareness among people regarding the health hazards of pollution should drive demand for pollution abatement products.

Stringent Government Regulations: Rising concerns over greenhouse gas emissions, ozone depletion and the destruction of ecosystem led countries worldwide to set strict emission standards and implement laws and regulations to curb the same. This should continue to drive demand for pollution-control equipment. The U.S. government's heightened focus on climate change is expected to create business opportunities for industry players. Technological advancements and new product launches are expected to support growth of the industry.

Emergence of Alternative Sources of Energy: Amid government pressure to achieve net-zero emissions, more and more companies are ramping up their sustainability initiatives. Automakers are rapidly transitioning to electric vehicles as part of their sustainability goals. This is expected to dampen demand in the industry. Moreover, with the United States and other developed countries reducing their dependencies on fossil fuels and switching to renewable sources of energy for power generation and industrial activities, demand for industrial emission-abatement products and technologies is witnessing a setback. Supply-chain constraints, and high costs of raw materials, labor and freight are other headwinds plaguing the industry. Pricing actions are providing some relief from inflationary pressures.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Pollution Control industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #8. This rank places it in the top 3% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, 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 in this group's earnings growth potential. The industry’s earnings estimates for 2023 have increased 26.5% since 2022-end.

Given the upbeat near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it is worth looking at the industry’s shareholder returns and its current valuation first.

Industry Outperforms S&P 500, Lags Sector

While the Zacks Pollution Control industry has outperformed the Zacks S&P 500 composite index over the past year, it has underperformed the broader Industrial Products sector.

Over this period, the industry has declined 3.3% compared with the broader sector’s 1.1% increase and the S&P 500 Index’s 10.9% decrease.

One-Year Price Performance

Industry's Current Valuation

Based on the forward P/E (F12M), a commonly used multiple for valuing pollution control stocks, the industry is currently trading at 20.97X compared with the S&P 500’s 17.86X. It is also above the sector’s P/E (F12M) ratio of 16.44X.

Over the past five years, the industry has traded as high as 30.94X, as low as 16.08X and at the median of 21.74X, as the chart below shows:

Price-to-Earnings Ratio

Price-to-Earnings Ratio

 

3 Pollution Control Stocks to Buy

Below we discuss three stocks from the industry with solid growth opportunities. Each stock carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Tetra Tech: Strength in the Commercial/International Services Group owing to robust utilization in high-performance buildings, environmental programs and renewable energy services has been aiding Tetra Tech. Successive acquisitions to expand product lines and market presence are fueling the company’s growth. This January, TTEK acquired RPS Group, Reston and Amyx, enhancing its consultancy in water, environment and sustainable infrastructure and expanding its use of advanced data analytics, cybersecurity and agile software development solutions for its government and commercial customers. However, the stock has declined 14.5% in a year.

Headquartered in Pasadena, CA, Tetra Tech provides consulting, construction management, engineering, program management and technical services. The Zacks Consensus Estimate for the company’s fiscal 2023 earnings has been revised upward by 3.5% in the past 60 days.

Price and Consensus: TTEK

 

Energy Recovery: Energy Recovery is poised to benefit from strength in its desalination and industrial wastewater business, product introductions and a strong pipeline of projects for the quarters ahead. The stock has gained approximately 16% in a year.

Headquartered in San Leandro, CA, Energy Recovery is a leading global developer and manufacturer of highly-efficient energy recovery devices utilized in the water desalination industry. The Zacks Consensus Estimate for ERII’s 2023 earnings has been revised upward by 50% in the past 60 days.

Price and Consensus: ERII

 

Vertex Energy: Vertex Energy expects to benefit from key market drivers such as continued strength in global refined product demand, reduced capacity in global refining throughput and below-average levels of domestic inventories of refined products, including gasoline and distillate, to support growth in the near term.

Being an energy transition company, Vertex Energy focuses on the production and distribution of conventional and alternative fuels. The Zacks Consensus Estimate for VTNR’s 2023 earnings has been revised upward by 35.3% in the past 60 days. The stock has appreciated 19.4% in a year.

Price and Consensus: VTNR