With rising greenhouse gas emissions and growing awareness regarding the health risks of environmental pollution, strong demand for pollution abatement products bode well for the Zacks Pollution Control industry. However, corporations focusing on green initiatives and the growing adoption of alternative sources of energy in power generation and other activities act as hindrances to the industry’s growth. Persistent supply chain issues and cost inflation are other concerns for the industry in the near term.
Despite headwinds, steady demand in the industry should benefit Tetra Tech TTEK, Donaldson Company, Inc DCI and Fuel Tech FTEK.
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
Strong Demand for Air Pollution Control: With rapid urbanization, an increase in greenhouse gas emissions from the industrial sector promotes demand for air quality control systems. Growing awareness among the masses to mitigate the health hazards of air pollution is a key growth driver for the pollution control market. Amid rising environmental pollution, governments worldwide have set emission standards and implemented laws and regulations to curb the same. This should continue to boost 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 foster 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 expected to create business opportunities for the industry players.
Emergence of Alternative Sources of Energy: Amid government pressure to reduce emissions, renewable sources of energy have replaced fossil fuels in power generation. Corporations have increasingly been focusing on sustainability initiatives to achieve their net-zero targets. 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. 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 pressure.
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 #165. This rank places it in the bottom 35% 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. The industry’s earnings estimates for 2023 have decreased 10.8% over the past year.
Despite the dull near-term prospects, we will present a few stocks that you may want to retain in 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 both the Zacks S&P 500 composite index and the broader Industrial Products sector.
Over this period, the industry has declined 4%, compared with the broader sector and the S&P 500 Index’s increase of 9.5% and 6.5% increase, 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 22.40X compared with the S&P 500’s 19.52X. It is also above the sector’s P/E (F12M) ratio of 16.57X.
Over the past five years, the industry has traded as high as 30.81X, as low as 16.71X and at the median of 23.06X, as the chart below shows:
3 Pollution Control Stocks to Keep a Tab On
Each of the stocks discussed below carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks.
Tetra Tech: Headquartered in Pasadena, CA, Tetra Tech provides consulting, construction management, engineering, program management and technical services. Increasing demand from commercial and government clients to address climate change issues, such as water scarcity, infrastructure vulnerability and environmental degradation, should fuel the company’s growth. The January 2023 acquisition of RPS Group, which has expanded TTEK’s water practice in the United Kingdom and strengthened its foothold in renewable energy and environmental management, bolsters its growth.
Tetra Tech has a stellar earnings surprise history. The company has outperformed the Zacks Consensus in each of the preceding four quarters, the average beat being 12.6%. The stock has gained 13.3% in a year.
Price and Consensus: TTEK
Donaldson: Headquartered in Bloomington, MN, Donaldson is engaged in the manufacturing and selling of filtration systems and replacement parts across the world. Strength in the Mobile Solutions segment due to high levels of global equipment production in Off-Road and On-Road and pricing actions is expected to bolster the company’s growth. Successive acquisitions are expected to boost DCI’s top line. In June 2023, the company acquired Univercells Technologies, expanding its growing offering in the life sciences industry. In February, the company acquired Isolere Bio, creating a leading separation and filtration solutions for emerging genetic-based drugs.
Donaldson’s earnings have trumped the Zacks Consensus Estimate in three of the preceding four quarters, while matching estimates in one. The average beat was 4.6%. The stock has gained approximately 9% 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 U.S. Environmental Protection Agency’s March 2023 ruling to reduce emissions of nitrogen oxides from power plants and certain industrial facilities in 23 states should drive growth of Fuel Tech’s Air Pollution Control business segment. A robust pipeline of contracts in the Air Pollution Control business segment is a key catalyst to the company’s growth.
Fuel Tech’s shares have declined 17% in a year. Nevertheless, the company’s earnings have surpassed the Zacks Consensus Estimate in three of the preceding four quarters, while missing in one. The average beat was 54.2%.
Price and Consensus: FTEK
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