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3 Stocks to Buy From the Thriving Pollution Control Industry

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The Zacks Pollution Control industry’s growth is poised to benefit from strong demand for air pollution abatement products, thanks to rising greenhouse gas emissions and growing awareness among the masses regarding health-related risks. Strict laws and emission standards implemented by countries worldwide should continue to drive demand for industry participants.

However, increased adoption of renewable sources of energy with rising preference for alternative fuels and electric vehicles have marred the outlook of the industry. Donaldson Company, Inc. (DCI - Free Report) , Atmus Filtration Technologies Inc. (ATMU - Free Report) and Fuel Tech, Inc. (FTEK - Free Report) are likely to capitalize on these opportunities.

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 and 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.

Major Trends Shaping the Future of the Pollution Control Industry

Strong Demand for Air Pollution Control: Rapid urbanization and the resultant increase in greenhouse gas emissions from the industrial sector promote demand for air quality control systems. Growing awareness among people to mitigate the health hazards of air pollution is a key growth driver of the pollution control market. Also, higher infrastructure-related work in several developing countries is driving demand for pollution abatement equipment and technologies.

Stringent Government Regulations: Strict emission standards and laws implemented by countries across the globe to tackle the destruction of the ecosystem and ozone depletion should continue boosting the demand for pollution-control equipment. Europe has some of the strictest pollution control laws in place. This should drive demand for high-quality pollution control solutions in the region. The U.S. government's heightened focus on climate change is also expected to create business opportunities for industry players.

Addition of Oil Rigs: The increase in oil prices amid the Russia and Ukraine conflict has made U.S. shale drillers consider adding rigs. This implies the possibility of more oil production, thereby spurring demand for pollution control equipment and services. Also, the requirement for engineering and assessment services in disaster-related work is creating a favorable demand environment for industry players.

Emergence of Alternative Sources of Energy: Amid government pressure to reduce emissions, renewable sources of energy have taken over fossil fuels for power generation. Corporations have increasingly been focusing on sustainability initiatives to move ahead in their path to net-zero emissions. Automakers are rapidly transitioning to electric vehicles as part of their sustainability goals. Although beneficial for environmental protection, these actions are a setback to the industry’s growth.

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 #73. This rank places it in the top 29% 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 outperform 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 2024 have increased 0.9% since the end of September 2023.

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 Underperforms Sector & S&P 500

Over the past year, the Zacks Pollution Control industry has underperformed the Zacks S&P 500 composite index and the broader Industrial Products sector.

Over this period, the industry has appreciated 20.4% compared with the broader sector’s and the S&P 500 Index’s increase of 31.1% and 25.2%, respectively.

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 26.12X compared with the S&P 500’s 21.21X. It is also above the sector’s P/E (F12M) ratio of 19.01X.

In the past five years, the industry has traded as high as 33.02X, as low as 19.93X and at the median of 25.14X, as the chart below shows:

Price-to-Earnings Ratio

Price-to-Earnings Ratio

3 Pollution Control Stocks Leading the Pack

Atmus Filtration: Headquartered in Nashville, TN, the company is a leading designer and producer of filtration and media solutions. The company’s leading position in the industrial filtration market, effective pricing actions and sound capital allocation strategy are expected to support its growth. Its investments in manufacturing capacity to improve automation and provide its customers with industry-leading products should bolster growth. ATMU currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks.

Atmus Filtration’s earnings surpassed the Zacks Consensus Estimate thrice in the preceding four quarters. Shares of the company have rallied 53.6% in the past year.

Price and Consensus: ATMU

Donaldson: Headquartered in Bloomington, MN, the company is engaged in the manufacturing and selling of filtration systems and replacement parts across the world. DCI is well-positioned to benefit from its focus on innovation, growth investments and a healthy demand scenario in the quarters ahead. Continued strength in dust collection sales and power generation project timing within the industrial filtration solutions business bodes well for the company. Recovery in Disk Drive demand is boosting the Life Sciences segment. The acquisitions of Univercells Technologies and Isolere Bio, which have strengthened DCI’s Life Sciences segment, are expected to bolster the top line.

Donaldson’s earnings beat the Zacks Consensus Estimate in three of the preceding four quarters and matched the same once, the average surprise being 4.5%. The Zacks Rank #2 (Buy) stock has gained 20.2% in a year.

Price and Consensus: DCI

Fuel Tech: The company develops technology for air pollution control and provides process optimization, water treatment and advanced engineering services. The Zacks Rank #2 company’s business development activities, with an increased focus on global emission protocols across a variety of fuel sources, should drive Fuel Tech’s growth. Increased sales of ULTRA, SCR, SNCR and FGC emissions control solutions have been driving its performance. A robust pipeline of contracts in the Air Pollution Control business segment is a key catalyst to FTEK’s growth.

Fuel Tech’s earnings surpassed the Zacks Consensus Estimate twice in the preceding four quarters. The average beat was 11.1%. The company’s shares have increased 0.8% in the past year.

Price and Consensus: FTEK

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

Donaldson Company, Inc. (DCI) - free report >>

Fuel Tech, Inc. (FTEK) - free report >>

Atmus Filtration Technologies Inc. (ATMU) - free report >>

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