3 Pollution Control Stocks to Overcome Industry Headwinds
Rising preference for alternative fuels and electric vehicles, high costs related to frequent product upgrades, and lingering effects of supply-chain issues have marred the outlook of the Zacks Pollution Control industry. The shortage of skilled labor in the United States has been another concern for the industry participants.
However, the industry is benefiting from the growing pollution-related health concerns, and efforts to adhere to pollution-related national and international norms. Donaldson Company, Inc. DCI, CECO Environmental Corp. CECO and Fuel Tech, Inc. FTEK are likely to capitalize on the 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, 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.
Major Trends Shaping the Future of the Pollution Control Industry
Growing Popularity of Alternative Fuels: Higher utilization of alternative fuels for power generation to reduce the dependency on coal in the United States and other developed countries across the world is restraining the demand for industrial emission-abatement products and technologies. Factors like supportive government policies related to renewable energy, increased renewable investments, a reduction in overall costs of generating renewable electricity and the rapid adoption of electric vehicles (EV) have made the prospects of the industry players gloomy.
Costs Related to Investments in Product Updates: Based on the guidelines of the pollution control boards in several countries, pollution-control equipment manufacturers frequently update their products and services. Such frequent investments often hurt the margins and profitability of the industry participants. Despite improving, the lingering effects of supply-chain constraints might continue weighing on the profitability of several industry participants. The shortage of skilled workers in the United States has been another persistent concern for the industry.
Stringent Government Regulations: Strong demand for pollution abatement technologies and services across manufacturing plants, owing to their adherence to industrial regulatory compliances, has been benefiting the industry participants. Europe has some of the strictest pollution control laws in place. The heightened focus on climate change across the globe is also expected to create business opportunities for the industry players. Solid demand for medical, pharmaceutical and hazardous waste management services is also boosting the prospects of some industry participants.
Industrialization: An increase in environmental management programs, along with infrastructure development and rapid urbanization, is creating a solid demand environment for the industry participants. A few industry players have been gaining from increased requirements for consulting and engineering services focused on water, environment, sustainable infrastructure, energy and resource management.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Pollution Control industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #205. This rank places it in the bottom 18% 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 bleak 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.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
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 declined 6.6% against the broader sector and the S&P 500 Index’s growth of 6.4% and 20.6%, 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 24.20X compared with the S&P 500’s 19.98X. It is also above the sector’s P/E (F12M) ratio of 16.81X.
Over the past five years, the industry has traded as high as 31.60X, as low as 17.47X and at the median of 24.60X, as the chart below shows:
Price-to-Earnings Ratio
Price-to-Earnings Ratio
3 Pollution Control Stocks to Keep a Close Eye on
Donaldson: Headquartered in Bloomington, MN, the company is engaged in the manufacturing and selling of filtration systems and replacement parts across the world. Increasing sales of defense-related products has been driving its Aerospace and Defense segment of late. Continued strength in dust collection sales and power generation project timing within the industrial filtration solutions business augur well for the company. The acquisitions of Univercells Technologies and Isolere Bio, which have strengthened DCI’s Life Sciences segment, are expected to bolster its top line.
Donaldson’s earnings beat the Zacks Consensus Estimate in three of the preceding four quarters and matched the same once, the average beat being 3.9%. The Zacks Rank #2 (Buy) stock has gained 3.5% in a year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: DCI
CECO Environmental: Headquartered in Dallas, TX, this is an environmentally-focused industrial company serving diverse markets of industrial air, industrial water and energy transition. Strong orders and backlog levels are supporting the company’s growth. Its strategic acquisitions to expand capabilities in the industrial air and industrial water platforms should bolster growth. CECO currently carries a Zacks Rank #3 (Hold).
CECO Environmental’s earnings surpassed the Zacks Consensus Estimate twice in the preceding four quarters, while meeting and missing estimates once each. Shares of the company have rallied 33.9% in the past year.
Price and Consensus: CECO
Fuel Tech: The company develops technology for air pollution control, and provides process optimization, water treatment and advanced engineering services. Strong project executions, along with increased sales of aftermarket products, have been driving Fuel Tech’s performance. The Zacks Rank #3 company’s business development activities, with an increased focus on global emission protocols across a variety of fuel sources, should drive its growth. 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 in three of the preceding four quarters, while missing in one. The average beat was 54.2%. The company’s shares have been stable in the past month.
Price and Consensus: FTEK
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CECO Environmental Corp. (CECO) : Free Stock Analysis Report
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