CECO Environmental Stock Tanks On Q4 Earnings, Opportunity Knocks (NASDAQ:CECO)

CECO Environmental Corp. (NASDAQ:CECO) is a leading company in the environmental services space. The company is one that we have not traded in a few years, but the company is performing very well, and the stock has appreciated nicely in the last year.

This company designs and manufactures equipment to help control air pollution and treat industrial wastewater and also offers services related to these areas, such as engineering and installation. Some of the air pollution products include scrubbers, cyclones, and electrostatic precipitators. For water treatment, they work on filtration and separation systems. The company works with and services a number of industries including energy, utilities, and chemical companies.

If you are of the ESG type investing, or interested in so called ‘green, eco-friendly’ investing, CECO is worth a look. They are committed to sustainability, and working to improve constantly impacts to the environment. And the stock just went on sale, following a beat and raise in the just-reported quarter.

We think CECO shares find support around the $19 level. This is a bit of a bad beat here, as the company delivered tremendous gains and upped its guidance. We think investors and traders should consider CECO stock here. Let’s take a look at the just-reported earnings and why we are excited about the growth.

The growth is impressive here. Folks, in Q4 the company saw revenue grow 42% from last year, hitting $153.7 million. In addition, the company’s backlog increased another 19% and stands at $370.9 million. Backlog is a good indicator of future revenues.

Take a look at the growth metrics here.

A lot of these growth metrics are well above 5-year averages. Jumping off the page is the free cash flow growth. The Q4 free cash flow was $12.2 million, rising 33% from last year. This comes as operating income was $12.7 million, up $4.3 million or 51%. Adjusted operating income was $16.3 million, up $5.3 million or 48% from last year. The growth in EBITDA is impressive. Adjusted EBITDA was $19.4 million, a 12.6% margin, and rose 49% compared to $13.0 million a year ago, while net income was $10.1 million, up $2.7 million, or 36% from last year. The results for EPS were $0.28, and surpassed estimates.

So the company is exiting 2023 with strong free cash flow generation and a great backlog. As we move into 2024, management indicates it will be entering a “significant sales pursuit pipeline.” Folks, we think the growth continues and this selloff is an opportunity. This comes as management upped its 2024 outlook.

CECO’s 2024 full year revenue is now seen at $590 to $610 million, up approximately 10% year-over-year at the midpoint. Some may argue this is a deceleration of growth, which is fair, but adjusted EBITDA is seen at $67 to $70 million, up approximately 19% year-over-year at the midpoint. And here is the thing folks. If this was being used a reason to sell today, it comes as strange given this 2024 full year guidance his higher than the $575 to $600 million in revenue and adjusted EBITDA of $65 to $70 million that was communicated prior. Free cash flow is also seen as a strong 50% to 70% of Adjusted EBITDA.

So what else? Well the company is also coming into 2024 with a great balance sheet. They have access to debt markets if needed for M&A opportunities or expansion. The company continues to manage its debt and interest payments to drive higher EPS. The operating leverage is around 1.6X with gross debt of $126.8 million, and cash and equivalents of over $50 million.

As we look ahead, this selloff seems to be a gift in relation to the growth CECO Environmental Corp. is enjoying. A beat and raise usually does not result in a double-digit decline. Perhaps the stock ran too far too fast, but we see shares as a buy at $19 here.