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Ceco Environmental: Three Takeaways from the Q4 Conference Call

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March 19, 2014 – Comments (0) | RELATED TICKERS: CECE

Ceco Environmental (CECE) is a global air pollution control company that I have evaluated in the past as a potential investment opportunity. In its recent released Q4 2013 earnings report the company beat expectations with an EPS of $0.26, but missed revenue expectations. This was despite the fact that its revenue expanded over 100 percent year over year, mainly on account of acquisitions, and gross profit was up 50% from last year. But to me the highlights of earnings release were in the following three themes that indicate the future direction of the company.

Acquire and Integrate: In my last article on Ceco I had written in detail about the business and management’s strategy relating to acquisitions. Total revenue in 2013 was $197 million compared with $135 million primarily due to the acquisition of new businesses. In order for an acquisition to be successful it is crucial for the integration of the new asset with the existing operations to be seamless. In this regard the company has been successful so far in smoothly integrating the recent acquired MetPro and realizing $9 million of synergies from it. Management has consolidated 3 manufacturing facilities and office buildings, selling the Met Pro facility and moving ahead on the path of realizing synergistic value from the integration. Recent acquisitions have opened up new revenue sources, contributed to an increase in bookings as well as more recurring business opportunities. Another example of the effective management of the integration process has been that operating margins improved with MetPro under the Ceco umbrella, and the company was also able to achieve 19% SGA including MetPro, despite it having run on higher SGA before.  

Grow Overseas: The Company currently has about $3 billion of installed capacity worldwide and there is an opportunity to grow recurring revenue from this source since currently it counts for only about a third of the business. It is looking to expand operations in China both as a market and manufacturing source. In fact, it was indicated that there could be a potential acquisition as part of a manufacturing expansion initiative in China in the near future. While the company has operations in countries like India, China, Canada and Latin America, a large proportion of the business is still in the United States. So there is still room for expansion of its business internationally. Moreover in developing countries environmental/pollution control regulations and laws are likely to grow and create opportunities for the company.

OneCeco Initiative: Most of the revenue growth reported in the quarter was from acquisitions and organic growth was not robust during the period. But one of the company’s initiatives highlighted in the earnings call could also be instrumental in moving the dial on this. The OneCeco sales initiative is a tool to consolidate all air pollution control products and technologies and use this powerhouse to gain more market share and grow margins. The company is tracking its sales performance closely under this OneCeco “segment” and management expects that only 50% of the gains from this initiative have been realized yet. The initiative has already resulted in the creation of over 150 new RFQs and led to over a dozen new air pollution control projects. I think this could be an astute way to blend, bundle and leverage economies of scale for the benefit of Ceco as well as its customers. 

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