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Pollution Control Industry Outlook: Near-Term Prospects Bright

Zacks Equity Research

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 mainly used in commercial, automotive repair, industrial, home healthcare, retail, pharmaceutical and hospitality end markets.

Meanwhile, a few industry players provide solutions for dealing with industrial waste and commercial chemical products as well as technologies to tackle air pollution. Also, there is a company that provides services related to infrastructure, water, resource management, energy and others, to government and commercial clients.

Here are the three major industry themes:

  • Increased task orders due to higher infrastructure-related work in the United States has been benefiting pollution-control equipment manufacturers of late. Also, rising demand from emerging nations is encouraging. Escalating pollution-related health concerns, need for engineering and assessment services in disaster-related work and stringent government regulations are also building a solid demand environment for pollution control equipment manufacturers.
  • Recovery in the oil and gas market is helping the spending plans of energy exploration & production companies, in turn, driving demand for pollution-control equipment. Also, the December 2017 tax overhaul, increased government spending and President Trump’s long-awaited infrastructure program are likely to expedite corporate investments in the days ahead.
  • Profitability of pollution-control equipment manufacturers are at risk from inflationary pressure caused by imposition of tariffs on import of various categories of goods. Shortage of skilled workers as well as higher transit expenses are other woes. Meanwhile, to defy bottom-line stagnation, a few companies are offering products at higher prices which might dent demand.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Pollution Control industry is an 11-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #107, which places it at the top 42% 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 bright 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.

Our proprietary Heat Map shows that the industry’s rank has remained in the top half of the rank list for majority of the past eight weeks.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past month, the industry’s earnings estimate for the current year has been increased by 0.7%.

We will present a few stocks that have the potential to perform better than the market based on a strong earnings outlook. 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 the S&P 500 and its sector in the past year. While stocks in this industry have collectively increased 9.7%, the S&P 500 has gained 2.1% and the Zacks Industrial Products sector has declined 9.5%.
                        One-Year Price Performance Versus Sector

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 6.74. This clearly shows that the industry is trading below the S&P 500’s forward 12-month EV/EBITDA ratio of 9.80 and the sector’s 10.93.

Over the past five years, the industry has traded at the highest level of 8.74x forward 12-month EV/EBITDA ratio and lowest level of 4.91x. The median level, over the same period, was 6.89x.

                    Pollution Control Industry’s Valuation Versus Sector

Bottom Line

Increased demand for pollution-control equipment and services (both from commercial and public clients) will likely continue to boost companies in this industry. At present, we present four stocks which investors might be interested in.

A brief discussion on the chosen stocks is provided below:

Tetra Tech, Inc. (TTEK): This Pasadena, CA-based company currently has a Zacks Rank #2 (Buy). Over the past year, the stock has gained nearly 20.6%. The Zacks Consensus Estimate for the company’s fiscal 2019 (ending September 2019) earnings per share has increased 3.1% in the past 60 days.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

                                       Price and Consensus: TTEK

Sharps Compliance Corp. (SMED): This Houston, TX-based company currently sports a Zacks Rank #2. Over the past month, the stock has gained nearly 16.5%. The Zacks Consensus Estimate for fiscal 2019 (ending June 2019) earnings per share are projected to grow 250% year over year.

                                        Price and Consensus: SMED

Heritage-Crystal Clean, Inc. (HCCI): The stock of this Elgin, IL-based company has risen 21.3% over the past year. Though stable in the past 60 days, the Zacks Consensus Estimate for 2019 earnings per share reflects year-over-year growth of 67.8%. The stock currently carries a Zacks Rank #2.

                                       Price and Consensus: HCCI

Advanced Emissions Solutions, Inc. (ADES): The shares of this Highlands Ranch, CO-based company has gained 35.7% in the past year. The company’s earnings estimates for 2019 have remained stable in the past 60 days but will likely grow 39.7% year over year.  The company currently carries a Zacks Rank of 3.

                                   Price and Consensus: ADES

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