Investment Strategies

Environmental services draws investor attention

Progress, the needs of an expanding population and globalization bode well for this sector

Apr 13, 2014 @ 12:01 am

By Craig Lawson

Investors don't have to be of a socially conscious bent or have strong views on climate change to see intriguing long-term investment opportunities in environmental services, particularly in environmental sciences and management.

The environmental-services sector is already a $55 billion industry, spanning everything from protecting the water supply to the disposal of nuclear waste.

The science and management subsegments of this industry together make up an $8 billion market. These are the firms that handle all the analysis and research that needs to take place before regulators will allow projects and developments of all kinds to move forward.

CONSULTING FIRMS

Companies specializing in environmental science and management often operate as consulting firms. They will typically have offices in various locations, but many of these can have a single staff member, working out of his or her home.

As personnel-intensive businesses, they often employ “____ologists” with advanced degrees (e.g., biologists, toxicologists, agronomists, etc.), and they depend heavily on specific expertise and local relationships.

We are all familiar, in one way or another, with the kinds of studies and analysis these firms provide, as they are pervasive. Environmental regulations focused on everything from clean air to endangered species are inescapable, and the rules and regulations tend to move in one direction: toward more stringency.

If a state department of transportation wants to add a lane to a highway, it needs an environmental-impact study.

If a developer wants to buy a plot of land and entitle it for residential development, a study is needed for that, too.

Studies also are needed prior to constructing a new factory, or putting in place a wind farm or natural-gas pipeline.

Both public- and private-equity investors like these businesses for their low capital intensity and high return on assets. Typical revenue growth can vary widely but is often a healthy 5% to 15% and sometimes much more.

Businesses focusing on environmental science and management can be stand-alone enterprises or segments of larger companies, such as Australia's Cardno.

Other companies in this arena, all of which have been showing revenue growth and share price appreciation over the past year, include Exponent Inc., Stantec Inc., TRC Cos. Inc. and WS Atkins.

FRAGMENTED MARKET

Notwithstanding some larger players, the market is still highly fragmented. Some smaller shops can be regional, focused on key local issues.

By way of example, you may have one specializing in superfund cleanups in the Rust Belt, another in Florida doing aquifer and water quality testing, and another on the West Coast studying erosion impacts after wildfires.

In terms of mergers-and-acquisitions activity, there is a proliferation of deals in this sector as larger players buy smaller ones, often to fill a void in expertise, to access new customers or to expand geographically.

Adding to the attractiveness of the sector are some long-term trends.

In the energy industry, depending on location, stresses on natural resources are pushing industries toward hydraulic fracturing and deep-water drilling, both of which have controversial elements and require a great deal of research. There is additional study required on the impact of the infrastructure and services built around these efforts as well, such as housing, roads, pipelines and waste disposal sites.

MORE STUDIES

As urban and suburban areas sprawl further into undeveloped territory, and as the impact on everything from waterways to bird migration patterns becomes more intense, there will be more studies undertaken both by those looking to develop and those looking to stymie such efforts.

Other global long-arc trends include the scarcity of fresh water (depleted aquifers, pollution and rising sea levels), arable land, food production and safety, and carbon emissions.

The immutable drumbeat of progress, the needs of an ever-expanding population and globalization, among other macro trends, bode well for a sector tackling the associated complex issues that are here for eternity.

Craig Lawson is a managing director at MHT Midspan, an investment bank serving middle market companies.

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