Ceco Environmental (CECE) Looks Cheap Heading into a Margin Accelerating 2016 - Needham & Company

Needham & Company analyst, Sean Hannan, believes CECO Environmental (NASDAQ: CECE) is showing "signs of legacy growth beginning while costs and margin expansion look poised for even better traction as the PMFG integration accelerates". After a positive 3Q earnings call, CECE shares traded up 22% when the S&P 500 was roughly flat but the gains were fleeting and the stock is now down 4%. Despite the pullback, 2016 estimates look low and the analyst thinks the recent pressure is overdone for 4 reasons:

1) comps should become easier for CECE in 2016. We believe legacy CECE (which in 2016 would then include the late ’14 acquisitions of Emtrol and Zhongli), should start to see some moderate y/y growth in addition to what could be at least a more stable FX comparison (vs. what was experienced as directional trends ’15).

2) upside exists to model. We model $498M for '16 (vs. TTM proforma of $486M for '14). Our model includes conservative assumptions for moderate growth in legacy CECE as FX could comparatively be less of a headwind while backlog is monetized and good momentum at Zhongli and Emtrol continues.

3) margins should improve in 2016 with PMFG synergies. CECE has a well-established history of driving margin expansion, particularly through "optimizing" operations of acquired companies. CECE was quite successful driving cost synergies in its last sizable publicly traded acquisition (Met-Pro) that well exceeded initial expectations.

4) Valuation looks attractive. CECE is trading below historical norms on a NTM EPS basis despite the opportunity for accelerated earnings growth in 2H16. Shares currently trade at 10.2x NTM EPS est. of $0.84 (vs. 5yr avg/min/max history of 13.3x/7.5x/26.5x).

No change to Buy rating or $13 PT.

For an analyst ratings summary and ratings history on CECO Environmental click here. For more ratings news on CECO Environmental click here.

Shares of CECO Environmental closed at $8.44 yesterday.

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