Pollution-Control Stocks Ride Environmentalist Wave
Date: 19-Jul-07
Country: US
Author: Rachel Breitman
Sporting valuations reminiscent of the heady days of the Internet boom, the group is up nearly 40 percent this year as equity buyers speculate on increased demands for purified water, cleaner-burning fuels, and alternative energy sources.
Stock prices have doubled for Pittsburgh-based water-treatment provider Calgon Carbon Corp.,and tripled for Springfield, Virginia, environmental and defense contractor Versar Inc. Even the group's poorest performer, Lancaster, New York environmental consultant Ecology and Environment Inc., is up 17 percent, about double the benchmark Standard & Poor's 500 index.
Still, profits have been inconsistent and revenue growth spotty. The few companies that are widely tracked by brokerage analysts show highly speculative valuations, with Batavia, Illinois, fuel-treatment company Fuel Tech Inc> trading at 84 times prospective earnings.
"These stocks have been on a strong run, but the price valuations might be a little inflated," said Michael Herbst, a Morningstar analyst who has followed environmentally focused exchange-traded funds. "These companies have been in the spotlight, if one company doesn't land that 'big deal,' the stock price could take a big beating."
A BET ON GOING GREEN
A number of factors are driving the group's popularity, from new global warming legislation to expected water shortages.
A proposed US Senate bill would require a cut in greenhouse gas emissions to 2006 levels by the year 2020, and 2000 levels by the year 2050. The bill may get a boost from the Democratic majority and increased focus on the hot-button topic of global warming in the run-up to the Presidential election.
Also, existing US Environmental Protection Agency regulations from 2004 are pushing businesses to reduce nitrogen oxide in 28 states by 60 percent, mercury by 70 percent by 2018 and sulfur dioxide by 70 percent by the year 2015.
"Right now there is unprecedented investment in pollution control technology," said EPA spokesman John Millett. "Companies are making big expenditures, hiring engineering and design firms."
US agencies like EPA and the Department of Defense are also spending money on pollution clean-up, with government contractors making deals with companies like Versar.
Revenue doubled in Versar's latest quarter, and earnings surged 240 percent. The earnings are keeping pace with the stock's 243 percent climb to US$13.90.
Still, with a trailing price-to-earnings ratio of 27.25 -- no analysts cover the stock to provide a basis for a forward multiple -- Versar is pricey compared to other small cap stocks. The Standard & Poor's small cap 600 index sports a trailing p/e of just over 20.
Financial advisors are expecting other emissions control stocks to follow Versar's lead, despite market capitalizations as low as US$700 million for Fuel Tech.
"Fuel Tech is a very cheap solution that can be installed easily to meet the air pollution problem," said Graham Mattison, energy analyst at New York's Lazard Capital Markets.
Lazard rated the company, which reduces nitrous oxide emissions from combustion boilers and converts urea to ammonia, as a "buy" despite lagging earnings.
In 2006, Fuel Tech's profits fell 10 percent, and were down 5 percent for the first quarter of 2007. Nonetheless, share prices jumped 38 percent year-to-date to US$34.11 as of Tuesday. Only a year ago, the stock was trading below US$11.
The profit gyrations have not dampened investors' enthusiasm. Environmental consultant TRC Companies Inc. posted a loss for in the first quarter, but is up 37 percent this year, now trading at US$11.80. That's 59 times estimated 2007 earnings of 20 cents per share.
Ecology and Environment's profit fell 22 percent in the most recent quarter because of dwindling contributions from Hurricane Katrina relief contracts. Still the stock has tone up 17 percent year to date. It still trades at 21 times last year's earnings