Air Pollution Control Equipment, CECO Environmental (NASAQ: CECE), Solid footprint, Increasing Market Share

Air Pollution Control Equipment, CECO Environmental (NASAQ: CECE), Solid footprint, Increasing Market Share

The multi-billion dollar air pollution control and ventilation equipment industry rests on strong fundamentals. Long-term demand is driven by regulatory requirements, overall industrial expansion, and the need to support that expansion with greater power generation and refining capacity.

No single company has meaningful market share in this industry. CECO Environmental (NASDAQ: CECE) with over $138 million in revenue for the 12 months ending 9/30/12 is a small part of this market but has a solid footprint.

CECE believes it is the largest provider of complete air pollution control and ventilation industry solutions and one of the largest and most diversified providers globally. Engineered equipment (cyclones, thermal and catalytic oxidizers, rolling mill ventilation, scrubbers, dampers, diverters, expansion joints, electrostatic precipitators, and chemical filtration) represents 70-75% of sales. Average order size is ~$400,000 and average manufacturing lead time is 3-4 months. Parts & service represent the remaining 25-30% of sales. CECE estimates that its installed base of equipment is over $2 billion. CECE serves a variety of industries with power generation, refining, and general industrial manufacturing comprising ~68% of sales. It has a diverse base of well-known customers but no single customer represents more than 4% of sales. International accounts for ~20% of total revenue with Canada and China the largest portions.

CECE had a loss during 2009. It has showed strong improvement since that time in part due to Jeff Lang, who became CEO in early 2010. Lang led an intensive strategic review and restructuring which resulted in shutting down or selling low-margin businesses. The results have been dramatic as shown in this table:

Dollars in millions except for EPS; net income and EPS are shown before extraordinary items

The Street expects CECE to deliver continued strong results as shown in the consensus estimates above (5 analysts). These estimates rest on strong orders and backlog which in turn reflect a strengthening global economy. They also rest on management success in repositioning CECE’s business model so that it can continue to deliver strong profitability from these orders. All five analysts have rated CECE the equivalent of “buy” or better.

CECE closed at $10.77 on 1/11/13. At that price, its multiple versus consensus 2013 EPS is about 14x which is below that of comparable companies in this industry. Furthermore, it has a modest PEG ratio.

CECE appears to represent a good way to take advantage of growth in the pollution control industry. Management has positioned itself to take advantage of growing opportunities as the global economy strengthens. With net debt of $-0-, CECE also has a very conservative financial posture that should allow it to weather most challenges over the near-term. Nevertheless, any investment in CECE stock comes with two caveats. First, revenue and earnings for capital goods producers, particularly those with long lead times, can vary from quarter to quarter as customers adjust, modify, or delay orders. Investors in CECE must be prepared for this lumpiness. Second, CECE had a history of acquisitions prior to 2009. CECE’s 2011 10-K states that management remains open to acquisitions. As with any company, the potential for acquisitions brings uncertainty to investors because of the risk because of poor execution and/or overpayment. An investor will want to keep these points in mind when considering an investment in CECE.