Why Ceco's Dividend Increase Translates Into A Higher Price Target

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The GeoTeam

Over the past few days, the GeoTeam's interest in Ceco Environmental (CECE) has been heightened. The company offers a special situation play similar to one that we had just recently highlighted in Orchids Paper (TIS), which has already experienced a gain of over 37% to a high of $19 since our mention. If history repeats itself, we may be at least looking at a successful trade and at most a very lucrative near-term investment opportunity.

Why we are so interested in CECE

On Friday, March 9, 2012, CECE announced that it was increasing its quarterly dividend per share by 40%, from 2.5 cents to 3.5 cents. We consider dividend increases greater than 25 % to be game changing scenarios. Since the announcement, the stock's price has gained 15%, but we feel that there is still room for the value of CECE to quickly appreciate up to $12.75 per share.

Our target price can be justified by reviewing the TIS play.

Similarities to the Orchids Paper Situation

Our assumptions regarding TIS proved to be spot on. At the time that we brought our interpretation of Orchid Paper's dividend increase to light, the company's shares were trading at around $14.50 per share. Commensurate with the dividend yield eventually settling closer to the value that it was prior to Orchid's dividend increase, TIS shares quickly increased in price and surpassed our target of $17 per share. Excerpts from our research:

[...]Prior to this dividend boost and based on the prior day's closing price of $12.67, the market had assigned to TIS a dividend yield of about 3%. The stock's price responded to the dividend news by rising sharply to $14.61. Even at the higher price, the dividend yield now stands at near 6%. Boosting the quarterly dividend could lead to a vote of confidence by investors who may now view

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