Craig-Hallum lifts CECO stock target, holds Buy rating on acquisition

On Monday, Craig-Hallum analyst Aaron Spychalla increased the price target on shares of CECO Environmental Corp (NASDAQ:CECO) to $40 from the previous $34, while reaffirming a Buy rating on the company's shares.

This adjustment follows CECO's recent completion of its acquisition of Profire Energy (NASDAQ:PFIE), a move that the analyst believes aligns with the company's strategy of expanding its market reach, particularly in the Energy and Industrial sectors, with a growing focus on Energy Transition.

The acquisition of Profire Energy, which specializes in combustion and burner management control solutions for gas applications, was finalized for $123 million. It stands as CECO's most substantial acquisition to date.

Spychalla notes that the deal is expected to contribute positively to CECO's margins, with approximately 50% gross margin and around 20% EBITDA margin. Further, he anticipates potential cost and commercial synergies that could result in a 7.0x-7.5x EBITDA purchase price.

Spychalla expressed optimism regarding CECO's prospects for a record number of orders in the fourth quarter of 2024, driven by the company's emissions solutions catering to the increasing needs for power generation. This trend is expected to continue into 2025, bolstering confidence in the company's prospects for double-digit organic growth in the years ahead.

During the Nuclear Energy Revisited Conference held in mid-December, CECO's senior management shared insights that suggest the nuclear segment of the business, while currently small, has the potential to double or even triple in size in the coming years. The analyst highlights that this growth could occur at margins that are significantly higher than the corporate average, as nuclear power gains traction as a means to provide zero-emission baseload power.

Spychalla's commentary underscores CECO's exposure to various secular themes that may be attractive to investors, including reshoring of industrial manufacturing, natural gas/LNG/RNG, infrastructure development, and the EV value chain, along with solar, wind, carbon capture, and hydrogen.

With a solid backlog, expanding margins, a robust balance sheet, and strong cash flow, coupled with what is deemed a reasonable valuation, Craig-Hallum's reiteration of the Buy rating and the elevated price target reflects a positive outlook for CECO Environmental Corp.

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