Although the company has incurred a net loss over the past seven years, now it seems to be the right time to invest in this company. In the last 6 months, CECO Environmental experienced an extraordinary demand of its products and services. Year over year, it´s revenues increased in Q1 by 62% and in by Q2 59%. The strong demand and improvements in it´s operating margin pushed the company into profitability, as it reported a net income of 0.12 cents a share in Q2.
Management holds more than 50% of the outstanding common stock of 12,8 Million shares and various hedge funds hold over 70% of the free float of 4.8 Million shares.
* Phillip DeZwirek (CEO): 2.6 Million
* Jason DeZwirek: 3.9 Million
* Sandler Capital Management: 1.55 Million
* Tontine Associates: 0.9 Million
* Dynamis Advisors: 0.47 Million
* Stark Asset Management: 0.44 Million
As the company`s backlog, which was at the end of Q2 $43.7 Million (an increase of 66% over its backlog of $26.3 Million at the end of Q205), and its bookings, which were at the end of Q2 $87 Million (an increase of 64% over its bookings of $53 Million at the end of Q205), are still growing at a remarkable high rate, the earnings should improve hopefully at a higher rate if the latest improvements in the operating margin will sustain. Higher margined international contracts, which made up 3% of sales over the last two years (or roughly $2.5 Million in 2005), have increased significantly in fiscal 2006, comprising over 10% of bookings to date.
However, the biggest risk seems to be the high leverage (189% long-term debt/equity) with its loans secured by substantially all of its assets, which may make it difficult to obtain additional debt financing on acceptable terms. Admittedly, according to William Gregozeski, a analyst at Capstone Investments, the company is working to pay off its debt by the end of the year and has received a new credit line, which includes interest rates 175 basis points below its previous rate and less restrictive covenants.
Due to the nature of its contract-specific business, the latest cash flows from operating activities were negative (Q1: -2.0 Million, Q2: -2.4 Million). Sluggish cash flows from operating activities in the coming quarters will be a warning sign, that the managament is unable to transfer revenues into earnings.
The stock is currently rated by only one analyst from Capstone Investments who has issued a Strong Buy rating with an price target of $17. William Gregozeski estimates that CECO Environmental will earn $0.37 in 2006 and $0.70 in 2007.
From a technical perspective, the stock seems to be quite strong:
* It had a strong run-up from $2 in May 2005 to nearly $13 in April 2006.
* The consolidation was a little bit to hefty as it lost almost 50% from its high in April. However, the stock found a very strong support at the 200 day moving average, which is a positive sign.
* The stock consolidated 3 months in a trading range between $7 and $9.
* The breakout on Friday, which was backed by a strong increase in trading volume, above the key-resistance at the $9-level and its 100 day moving average, could signal that the stock will climb to its recent high at $13.
CECE YTD chart:
However, given the strong constitution from a technical perspective an investor should watch closely the improvements in the cash flows from operating activities and possible sales of the mentioned hedge funds.
Disclosure: The author has a long position in CECE.