The growing adoption of renewable energy sources, coupled with the rising demand for alternative fuels and the increasing popularity of electric vehicles, has impacted the outlook of the Zacks Pollution Control industry. Another concern for industry players is the shortage of skilled labor in the United States.
However, strong demand for air pollution control products, arising from increasing greenhouse gas emissions and growing public awareness of the health related risks, has been allowing the industry participants to stay competitive in the market. Donaldson Company, Inc. DCI, CECO Environmental Corp. CECO, Energy Recovery, Inc. ERII and Fuel Tech, Inc. FTEK 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 consequent rise in greenhouse gas emissions from the industrial sector have been driving demand for air quality control systems. Growing public awareness of the health risks associated with air pollution is fueling market growth. Also, the expansion of infrastructure projects in developing countries is boosting the demand for pollution abatement equipment and technologies.
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. The lingering effects of supply-chain constraints may continue weighing on the profitability of several industry participants. The shortage of skilled workers in the United States is another persistent concern for the industry.
Emergence of Alternative Sources of Energy: The growing preference for renewable energy sources for power generation to reduce 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. Several factors, including supportive government policies related to renewable energy, higher 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.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Pollution Control industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #200. This rank places it in the bottom 20% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the weak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping less faith in this group's earnings growth potential. The industry’s earnings estimates for 2025 have decreased 2.2% since the end of February 2024.
Despite bleak near-term prospects, we will present a couple of stocks that you may want to retain in your portfolios. But it is worth taking a look at the industry’s shareholder returns and its current valuation first.
Industry Outperforms Sector, Underperforms S&P 500
Over the past year, the Zacks Pollution Control industry has underperformed the Zacks S&P 500 composite index and outperformed the broader Industrial Products sector.
Over this period, the industry has grown 10% compared with the broader sector’s and the S&P 500 Index’s increase of 7.7% and 22.6%, 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 23.89X compared with the S&P 500’s 22.39X. It is also above the sector’s P/E (F12M) ratio of 19.40X.
In the past five years, the industry has traded as high as 33.69X, as low as 20.35X and at the median of 26.46X, as the chart below shows:
Price-to-Earnings Ratio vs S&P 500
Price-to-Earnings Ratio vs Sector
4 Pollution Control Stocks to Keep a Tab On
Donaldson: Headquartered in Bloomington, MN, Donaldson is engaged in the manufacturing and selling of filtration systems and replacement parts across the world. Solid momentum in the aftermarket business, driven by positive market trends and the impact of inventory reductions, is aiding the company’s Mobile Solutions segment. Strength in the commercial aerospace and rotorcraft markets is boosting the Industrial Solutions segment’s performance.
Donaldson’s earnings beat the Zacks Consensus Estimate in each of the preceding four quarters, the average surprise being 7.1%. The Zacks Rank #3 (Hold) stock has gained 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 that provides critical solutions in industrial air quality, industrial water treatment and energy transition solutions worldwide. Increased demand for separation and filtration services is supporting the company’s growth. The rising demand for industrial water technologies also bodes well. Its strategic acquisitions to expand capabilities in the industrial air and industrial water platforms should bolster growth. CECO currently carries a Zacks Rank of 3.
CECO Environmental’s earnings surpassed the Zacks Consensus Estimate thrice in the preceding four quarters and missed once, the average beat being 0.2%. Shares of the company have gained 34% in the past year.
Price and Consensus: CECO
Energy Recovery: Based in in San Leandro, CA, the company is engaged in manufacturing and designing energy efficiency technology solutions utilized in the water desalination industry. Energy Recovery is poised to benefit from strength in its desalination and industrial wastewater businesses in the quarters ahead. New product introductions and a strong pipeline of projects also bode well for it.
This Zacks Rank #3 company’s earnings surpassed the Zacks Consensus Estimate thrice in the preceding four quarters and missed once, the average beat being 156.2%. The Zacks Consensus Estimate for ERII’s 2025 earnings has been revised upward 4.1% in the past 60 days.
Price and Consensus: ERII
Fuel Tech: Based in Warrenville, IL, FTEK develops technology for air pollution control and provides process optimization, water treatment and advanced engineering services. An increase in new projects and strong project executions are aiding its APC technology segment. The Zacks Rank #3 company’s business development activities, with an increased focus on global emission protocols across a variety of fuel sources, should also drive its growth.
Fuel Tech’s earnings surpassed the Zacks Consensus Estimate in three of the preceding four quarters while missing the mark in one. The average beat was 45.8%. The consensus estimate for FTEK’s 2024 earnings has remained steady in the past 60 days.
Price and Consensus: FTEK
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