Stock Screen: Environmental Stocks With Low Valuations

About: Tetra Tech, Inc. (TTEK), DAR
by: Value Line
This article is now exclusive for PRO subscribers.


In this stock screen, we set out to find equities in the Environmental Industry that have relatively low valuations.

Environmental companies, as a whole, provide a vast array of services to businesses and municipalities that are paramount to keeping everyday activity running smoothly.

Prospects for the industry in the year ahead are bright, as a relatively favorable economic outlook should keep the waters calm.

Nicholas Patrikis


Environmental companies, as a whole, provide a vast array of services to businesses and municipalities that are paramount to keeping everyday activity running smoothly. The collection, removal, and disposal of waste can be easily identified as a major component of the industry, considering many of the larger environmental players are involved in that niche. However, that is only scratching the surface. Other services provided by companies under the environmental umbrella include air and water pollution control, removing medical waste, consulting and resource management, as well as collection and recycling services to the food industry.

Indeed, the industry can be pegged as somewhat cyclical in nature. While waste removal and disposal is a necessity across the board, the level of usage by businesses, hospitals, medical companies, and the broader public can fluctuate, resulting in potentially volatile top- and bottom-line performances. To no surprise, the strength of the general economic landscape plays a leading role in construction activity and public consumption.

Nevertheless, prospects for the industry in the year ahead are bright, as a relatively favorable economic outlook should keep the waters calm. Also worth noting is the elevated level of acquisitions and consolidations among the group, which have contributed to overall steady growth. What's more, profitability metrics ought to reap the aforementioned benefits.

For this screen, our only requirements were that the companies be in the Environmental Industry, and that they have a P/E ratio that is below the current Value Line average of roughly 19. The resulting list of five stocks can be seen below.

Darling Ingredients (NYSE:DAR) and Tetra Tech Inc. (NASDAQ:TTEK) are two companies from the list we feel are strongly positioned for bottom-line growth in the near term. These equities have been trading in a fairly tight range for the past several years. Thus, when compared to the broader market, investors may find these stocks attractive from a forward-looking price-to-earnings standpoint.

Darling Ingredients

Darling Ingredients is a rendering, recycling, and recovery solutions company, which provides its services to the food industry. Its operations encompass collecting and recycling animal by-products and used cooking waste to develop into specialty ingredients, as well as grease trapping services. As a business that operates on the global scale, DAR is susceptible to swings in the macroeconomic environment, along with changing commodity prices, and unpredictable government intervention. Consequently, financial performances over the past several years have been bogged down by numerous headwinds, placing a noticeable obstacle in the way of its share price. However, we feel the tide is beginning to turn. Indeed, now may present a decent opportunity for value-oriented investors looking to take advantage of a relatively inexpensive entry point and a company with bright financial prospects. Based on our forward-looking twelve month earnings-per-share forecast, Darling Ingredients' stock is trading around a P/E multiple of 14.

Darling's share price has held up remarkably, considering its recent trend of uninspiring year-over-year earnings comparisons. Although the stock has gained in value, shares of DAR have underperformed the S&P 500 since the start of 2011, appreciating roughly 45% compared to 55% for the popular index. Indeed, investors appear to be exercising a bit of caution, likely due to its below-average profitability in past periods. As a result, the restrained share price looks to be at a rather attractive valuation, after taking into consideration Darling's future earnings prospects.

We think better days are on the horizon for the bio-nutrient development company. Specifically, the bottom-line now has some wind at its back, starting with healthier Fuel segment margins, owing to improving corn and fat prices. Additionally, unusually harsh weather conditions, which led to fewer operating days and higher energy cost toward the end of 2013 and beginning of 2014, should be a non-factor for at least the next several quarters. This ought to allow its factories to return production to their maximum run rate (close to $700 million EBITDA).

Another positive catalyst for the company is the potential re-establishment of government policies and tax credits. For one, the recently expired $1-per-gallon biodiesel tax credit has the potential to be reinstated, which would potentially create up to $70 million in value. Lastly, acquisitions are the cornerstone of Darling's growth strategy, as evidenced by the plethora of recent deals, such as Rothsay and Vion. Management has stated its intention to remain fairly active in the global market for potential value-adding targets, which augurs well for top and bottom-line growth over the long haul.

Tetra Tech Inc.

Tetra Tech Inc. provides consulting, engineering, and construction services aimed at identifying problems and developing solutions for the environment, water management, and other energy and natural resource needs. The company services public and private enterprises, as well as government agencies responsible for managing water supply, updating aging infrastructure, and developing renewable energy sources. Out of TTEK's three reportable segments, Engineering and Consulting Services (ECS) comprises the largest piece of the pie (39%), based on 2013 revenues. Its Technical Services Support and Remediation and Construction Management segments are not far behind, accountable for the remaining 35% and 26%, respectively.

The company's top-line has been stagnant for the past couple of years, after demonstrating solid year-over-year growth trends, even throughout the 2008 financial crisis. Existing headwinds to revenue growth include a struggling Remediation and Construction Management segment (mainly parkland revenues) negative foreign currency effects, and lackluster federal spending. However, improving macroeconomic conditions ought to provide a spark to the top line. Nevertheless, TTEK is poised to substantially improve profitability in fiscal 2014, compared to 2013, despite tepid revenue growth.

The company's cost-control initiatives and focus on margin enhancement appear to be paying dividends, evidenced by improvements in the bottom-line, on an annual basis. Furthermore, Tetra Tech's outlook has become more positive of late, as management has raised its share-net guidance for fiscal 2014 to $1.75-1.80. On top of that, the company recently initiated a $0.07 quarterly dividend. While the current yield is nothing to write home about (roughly 1%), the motion to originate a payout speaks volumes to the company's stable financial position and bullish profit prospects.

In addition, several avenues of growth are evidently on the horizon. Leading the way are the oil & gas markets, which have the potential to maintain a growth rate of 20% over the long haul. TTEK may also look to widen its scope and expand its oil & gas operations into more opportunistic geographies, such as Western Texas and Western Canada. Growth through acquisitions could also be in the cards in the coming years. At present, these shares have a very reasonable P/E ratio of 14.

Company Name

Ticker Symbol

Stock Price

Current P/E ratio

Darling Ingredients




Fuel Tech Inc.




Republic Services




Tetra Tech




Waste Management




Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.