Set To Capitalize On Power Generation Super Cycle And Infrastructure Investments

Key Takeaways

• Strong backlog and order intake momentum position CECO for sustained revenue growth and future revenue conversion as projects transition.
  
• Strategic acquisitions and sectoral investment trends are expected to enhance market reach, earnings growth, and EBITDA through synergies and operational capabilities.
  
• Customer delays and potential integration issues from acquisitions, combined with tariff uncertainties and leverage risks, threaten revenue, margins, and financial stability.

Catalysts

Provides critical solutions in industrial air quality, industrial water treatment, and energy transition solutions in the United States, the United Kingdom, the Netherlands, China, and internationally.

• CECO Environmental enters 2025 with a record backlog of $541 million, up 46% from the previous year, providing strong visibility into revenue generation and potential for sustained revenue growth as projects transition to revenue.
  
• The company has demonstrated significant order intake momentum, with record quarterly orders in Q4 2024 at $219 million, reflecting a 71% increase. This momentum is expected to carry forward into 2025, contributing to future revenue as booked projects convert.
  
• With improved productivity and operational excellence, gross margins have expanded by approximately 500 basis points since Q4 2022. The company expects to continue benefiting from these efficiency gains, positively impacting net margins.
  
• Strategic acquisitions, including Profire Energy, are anticipated to expand CECO's market reach and support earnings growth through synergies and increased market penetration, further contributing to the expected strong EBITDA growth.
  
• The anticipated multiyear capital investment super cycle in the power generation sector, along with reshoring and global infrastructure investments, positions CECO well for future growth in both revenue and earnings, leveraging its capabilities in industrial air and water treatment solutions.

CECO Environmental Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CECO Environmental's revenue will grow by 14.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 7.9% in 3 years time.
• Analysts expect earnings to reach $65.9 million (and earnings per share of $1.74) by about March 2028, up from $13.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.5x on those 2028 earnings, down from 63.4x today. This future PE is lower than the current PE for the US Commercial Services industry at 30.0x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

CECO Environmental Future Earnings Per Share Growth

Risks

• Customer-driven project delays and slow booking realizations impacted revenue recognition in 2024, and similar issues could affect future revenue generation if they persist.
  
• The business experienced challenges with free cash flow due to working capital timing, which could affect profitability and operational flexibility if not resolved.
  
• While the backlog is strong, a significant portion of earnings growth is expected from recent acquisitions, which may carry integration risks that could impact net margins and overall financial performance.
  
• The continued uncertainty around tariffs and legislation could lead to potential cost increases, affecting net margins and making it more difficult to maintain profitability forecasts.
  
• The increased leverage ratio following recent acquisitions could pose a risk if interest rate changes or unexpected business challenges occur, potentially impacting net earnings and financial stability.

Valuation

• The analysts have a consensus price target of $35.8 for CECO Environmental based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $33.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $836.4 million, earnings will come to $65.9 million, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 7.4%.
• Given the current share price of $23.48, the analyst price target of $35.8 is 34.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.