Environmental services, steel could lead market

May 04, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

New leadership. That's what the stock market is seeking in this convoluted, volatile year.

It just may come from the strangest places.

Environmental services and big steel, two stock groups that have been heartbreakers to faithful investors in the past, may be ready to help provide the necessary boost.

Their reasonable stock prices and improving business prospects are gaining attention:

* Environmental services firms, their earnings pummeled by the weak environmental cleanup policies of the Bush and Clinton administrations, should benefit from the economic revival. Demand for commercial and industrial waste-collection services is up dramatically. Cutthroat competition has eased a bit, and the environment is gradually working its way up the priority list in Washington.

* Steel companies, thanks to pent-up demand of the automotive, appliance and construction industries, are booming after three years of losses. There's already a steel shortage in this country. Other parts of the world should be increasing their demand next year. During the past decade, steel companies improved production efficiency by spending $35 billion to modernize plants. In addition, labor tensions have subsided.

Covering a wide range of services from treatment of solid and hazardous wastes to pollution control, environmental services was a strong group in the latter half of the 1980s amid increased government regulation. Not much has happened in the 1990s.

"While the Clinton administration has been a major disappointment on environmental issues, it would be surprising if 12 to 18 months pass without a major new initiative so the administration can point to some progress," said Barry Mannis, environmental services analyst with Goldman Sachs. "I don't expect anything too complex, perhaps something involving the Clean Water Act."

This industry is due for a break.

"There will be a change in leadership of the stock market, and this group -- one of the biggest underperformers of the 1990s -- is ready," predicted Marc Sulam, environmental services analyst with Kidder Peabody. "There's an upside to earnings estimates, insiders are buying shares, and acquisition trends are returning to the industry."

Browning-Ferris Industries, second-largest player in the collection, processing, disposal and recycling of solid waste, receives a strong buy recommendation from Mannis and Sulam because it has improved efficiency and is best-positioned to gain from an upturn. A 20 percent growth rate is possible for 1994 and 1995.

WMX Technologies, largest in the field, is a pick of Sulam because its solid-waste business is reaping benefits of earlier restructuring and its momentum is building. (However, Chemical Waste Management, in which WMX has a 77 percent stake, has experienced difficulties in its hazardous-waste disposal business.) A 12 to 15 percent growth rate over the next three years is likely for WMX.

Wheelebrator Technologies, developer and operator of waste-to-energy and cogeneration facilities in which WMX has a 56 percent stake, is a Mannis selection. He expects 18 to 20 percent growth over the next three years. Envirotest Systems in automobile emissions testing should benefit from new requirements of the Clean Air Act. Threefold earnings growth is projected during 1994 through 1997.

The strength of the once-beleaguered steel industry is impressive, but vulnerability to the economy remains.

"If the Federal Reserve Board aggressively increases interest rates several more times, it would negatively affect cyclicals such as steel," warned J. Clarence Morrison, steel analyst with Prudential Securities. "On the other hand, higher shipments, moderate pricing increases and huge productivity gains make selected steel stocks worth buying."

The auto industry is helping steel firms.

"Pent-up demand is there for automobiles, with the average vehicle on the road now 8 years old," observed Donald Wampach, steel analyst with Duff & Phelps. "In addition, big steel companies are moving to six-year labor contracts that permit workers to keep jobs while cutbacks come from attrition, and labor is also getting a voice on boards of directors."

USX-U.S. Steel Group, the largest U.S. integrated steel producer, which has outpaced its rivals in profits lately, is recommended by Morrison and Wampach, particularly because of strong demand in the automotive portion of its business. Its facilities are up-to-date.

Bethlehem Steel Corp., second-largest steel producer, is suggested by both analysts because of its ambitious conversions to "mini-mills" to get costs down. While there's been a revival in its bottom line, more substantial recovery is expected next year.

Worthington Industries, involved in 14 different types of steel processing, is a Morrison favorite because of its solid earnings growth.

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