CECE

CECE: Still Compelling Especially as Air Pollution Control Market Expands

November 13th, 2010 by Yehuda Fruchter   |   No Comments

I first recommended CECE at $3.50. back in March 2010. The earnings this quarter appear to support continued financial improvements over the next year, and certain macro events, i.e. tougher government regulations with regards to air pollution, would seem to indicate that CECE, a leader in air pollution control products, has extraordinary growth opportunities over the next 5 years both in the US and internationally in emerging markets (i.e. China, India, and Brazil). Notably, according to The McIlvaine Company, a recognized independent market consulting firm with expertise in the air pollution control industry, the world market for air pollution control systems, products and services is forecast to grow from $65 billion in 2004 to $250 billion by 2015.

With regards to the coming year, the company, from I can recall, predicted near double digit increases in revenue and an near doubling of the operating margin to 7%. So in keeping with the Lynch motto – “If things at a company are getting better, you want to own its stock” – I’d say CECE remains an excellent investment at current prices ($5.20), especially considering the still very low enterprise valuation relative to sales and potential profits.

Finally, it is interesting to note that the Chairman of CECE and the company’s largest shareholder, continues to buy stock in CECE on the open market, providing further evidence that the future for the company is promising.

About the only negative for CECE, from my perspective is that the company has already turned the corner to profitability and I generally like to buy companies that are still losing money. However, the profit potential of CECE is still so far below what it could be considering what are still the lingering effects of the Great Recession, that the “money-losing” criteria can be relaxed at this juncture. The stock will become a sell when CECE sales recover to pre-recession highs and operating margins near 10%. Furthermore, the stock price still remains well beneath five year highs of $10+, indicating potential above average returns over the coming years.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in CECE. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise

CECO Environmental Corp (CECE): Interesting Green Play

March 18th, 2010 by Yehuda Fruchter   |   4 Comments

CECO Environmental Corp (CECE) bills itself as North America’s largest independent air pollution control company. I’ve found it nearly impossible (and way too boring) to sort thru all the myriad of subsidiaries this company acquired over the years to actually get a qualitative clear picture of the business. Nevertheless, from a simple quantitative perspective, the stock looks interesting at current prices ($3.50).

What attracts me, as always, is an “appearance” of massive losses, a stock price that’s near a five year low, an attractive industry, and a low EV/Sales valuation ratio.

As for the losses, while CECE reported a seemingly large loss of $14 million in the last quarter, the truth is that the loss is mainly attributable to a Goodwill impairment charge. Without the non-cash charge the company was profitable. In addition, despite massive accounting losses in the past year, the company was still able to cut debt in half over the last year from to $13.5 million from $26.7 million. This provides strong evidence of the company’s strong internal cash-flow.

Overall, in looking at the numbers, it seems clear to me that over the coming year, the financial comparisons will greatly improve, which should help the stock price recover somewhat. I also believe that the business has stabilized from a massive downturn, as indicated by the backlog which as of December 31, 2009 was $66 million compared to $68 million as of December 31, 2008. The “it’s not getting any worse” investment theme has strong appeal for investors, as evidenced by the incredible financial paper recovery over the last year.

Furthermore, over the longer-term, I believe there is incredible potential in the air pollution business, given the favorable regulatory backdrop and the increasing attention given by businesses to environmental concerns. So if the company’s claims are accurate (i.e. “We believe we are the leading provider of complete turnkey solutions to the air pollution control and industrial ventilation industry and one of the largest and most diversified turnkey solutions providers in North America. “), it seems inevitable that CECE will see strong growth over the coming 3 to 5 years.

The improving near-term financial results, coupled with the high future growth prospects in an industry with alot of “hype”, should attract investors into this beaten down stock.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in CECE. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise