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CECO Environmental Corp. (CECE) operates as a provider of air pollution control products and services. The stock has sold off more than 10% over only the past five trading days and is off more 60% from its high of $16 in October 2008. This creates a unique opportunity to buy CECE.

To make the case, I will first discuss the favorable long-term economics of CECE; subsequently, I will describe three catalysts that should move the stock higher in the more immediate future.

Economic Analysis

Several factors position CECE for strong long-term growth:

  • CECE is the largest provide of air pollution control products and services in a highly fragmented industry. That puts them into the position of consolidator, and it allows them to offer comprehensive turnkey solutions that its competitors cannot provide. These are long-term competitive advantages.
  • CECE benefits from several long-term growth drivers. Most notably, these are (1) increasing regulation by international, federal and state agencies; (2) a renaissance of the machinery, mining, and construction industries; (3) public pressure. These growth drivers are reflected in CECE’s revenue growth from $81.5M in 2005 to $235.9M in 2007. The current revenue target is $500M by 2013.
  • CECE has a diversified customer base of over 2300 active customers, including many internationals such as GE, P&G, Boeing, Honda, Ford, Siemens, and DuPont. This is important because it allows CECE to grow internationally with its clients; moreover, diversification reduces the risk of revenues.

At this point, it is also noteworthy that into the recent weakness, Phillip DeZwirek, CEO and Chairman of the Board, has been adding to his already large position in CECE stock.

Short-Term Catalysts

In addition to the favorable economics, CECE also benefits from several short-term catalysts:

  • At this point, the stock is entirely oversold and ready for a bounce.
  • The recent sell-off in CECE shares was triggered by unexpected costs, which lead to a quarterly loss. Some portion of these costs are expected to be refunded by the client whose contract caused the costs. This refund will be pure profit and will lead to a positive upside surprise in the future.
  • The stock is very cheap and at some point, investors will wake up to this fact. The backlog as of March 31, 2008 was $91M versus today’s market cap of $94M. For engineering companies that is cheap. Also, analyst expectations for 2009 EPS are $0.70 for a forward P/E multiple of 8.9. That also is unbelievably cheap for a company with 30% EPS growth.

With favorable long-term economics and several short-term catalysts, I consider CECE a buy.

Disclosure: Author holds a long position in CECE

Source: Catalysts Sending CECO Environmental Higher