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Pollution Control Industry: Near-Term Outlook Appears Solid

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The Zacks Pollution Control industry comprises 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 provide solutions for dealing with industrial waste and commercial chemical products as well as technologies to tackle air pollution. Also, one of the companies provides services related to infrastructure, water, resource management, energy and others, to government and commercial clients.

Here are the three major industry themes:

  • Stringent government regulations, higher infrastructure-related work in the United States and escalating pollution-related health concerns are driving demand for pollution control equipment and services. Also, rising demand in emerging nations is encouraging. For instance, the companies belonging to this industry continue to market their technologies successfully in many European countries in the wake of the European Union's Industrial Emissions Directive in BREF. In addition, need for engineering and assessment services in disaster-related work is boosting demand for products and services offered by these companies.
  • Despite conservative capital spending by U.S. explorers and producers, production volumes of oil and natural gas remain strong. This, in turn, is driving demand for pollution-control equipment. Moreover, the December 2017 tax overhaul increased government spending, and the U.S. administration’s long-awaited infrastructure program is likely to boost corporate investments.
  • Of late, inflationary pressure on account of tariffs on import of various categories of goods is creating supply-chain issues, and putting pressure on the profitability of pollution-control equipment manufacturers. Also, the industry participants are required to constantly update products and services, based on the guidelines of the pollution control boards in several countries. Such frequent investments often put weigh on companies’ margins and profitability. In addition, shortage of skilled workers owing to tight labor market in the United States remains a concern for industry players.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Pollution Control industry is a 13-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #88, which places it at the top 34% 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 outperformance in the near term. 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.

We will present a few stocks that have the potential to outperform the industry based on strong earnings growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms S&P 500 & Sector

The Zacks Pollution Control industry has outperformed both the S&P 500 and its sector in the past year. While stocks in this industry have collectively gained 20.2%, the S&P 500 and the Zacks Industrial Products sector have rallied 6.7% and 2.8%, respectively.

                                           One-Year Price Performance

Pollution Control Industry’s Valuation

EV/EBITDA ratio is commonly used for valuing pollution control stocks.

The industry’s forward 12-month EV/EBITDA ratio is 9.35. This clearly shows that the industry is trading below the S&P 500’s forward 12-month EV/EBITDA ratio of 12.16 and the sector’s 13.81.

Over the past five years, the industry has traded at the highest level of 9.44x forward 12-month EV/EBITDA ratio and lowest level of 5.10x. The median level, over the same period, was 7.38x.

                    Pollution Control Industry’s Valuation Versus Sector

                   Pollution Control Industry’s Valuation Versus S&P 500

Bottom Line

Strong public and commercial demand for pollution-control equipment products and services will likely continue to benefit the players in this industry. The majority of the stocks within this industry currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold). At present, we present four stocks which investors might be interested in.

A brief discussion on the chosen stocks is provided below:

Casella Waste Systems, Inc. (CWST - Free Report) : Headquartered in the Rutland, VT, the vertically-integrated solid waste services company has surged 51.6% over the past year. The Zacks Consensus Estimate for current-year earnings has moved up 1.3% to 81 cents over the past 30 days. The stock currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: CWST

CECO Environmental Corp. (CECE - Free Report) : The stock of this Dallas, TX-based company has gained 48.2% over the past year. The Zacks Consensus Estimate for 2019 earnings has risen 6% to 53 cents in the past 30 days. The stock currently has a Zacks Rank #2.

Price and Consensus: CECE

Energy Recovery, Inc. (ERII - Free Report) : The stock of this San Leandro, CA-based company has returned 21.4% over the past year. The Zacks Consensus Estimate for current-year earnings has increased 8% to 27 cents in the past 30 days. The stock currently has a Zacks Rank #2.


Price and Consensus: ERII

Tetra Tech, Inc. (TTEK - Free Report) : This Pasadena, CA-based company currently carries a Zacks Rank #2. Over the past year, the stock has gained nearly 30.3%. The Zacks Consensus Estimate for current-year earnings has moved up 0.3% to $3.05 for fiscal 2019 (ending September 2019) over the past 30 days.

Price and Consensus: TTEK


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