Natural Gas Projects And Thermon Combination Will Underpin Long Term Industrial Solutions Demand

Catalysts

About CECO Environmental

CECO Environmental provides engineered solutions that help industrial customers manage emissions, air quality, water treatment and process efficiency.

What are the underlying business or industry changes driving this perspective?

• Record orders of US$449 million in Q1 2026, April bookings already above US$400 million and backlog above US$1b point to a large base of contracted future work that can support revenue growth and operational leverage as projects convert to sales and earnings.
• Participation in large natural gas power generation projects, including the largest order in company history in the range of US$300 million, positions CECO to benefit from continued investment in gas fired capacity, which can support multi year revenue visibility and potentially higher EBITDA from scale.
• Exposure to natural gas infrastructure and a growing role along the full value chain, from wellhead to end user, creates more recurring project and equipment opportunities, which can support order intake and help sustain margins as project volume increases.
• Growing activity in semiconductor, electronics and industrial water markets, supported by a sales pipeline of roughly US$7.3b, gives CECO access to long duration investment in electrification, digitization and water reuse, which can broaden revenue sources and support gross margin mix over time.
• The pending Thermon combination, with an expected US$1.5b run rate of sales and targeted US$40 million in cost synergies plus additional commercial opportunities, offers a path to higher revenue, EBITDA and potential margin expansion as overlapping customer bases and product sets are combined.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on CECO Environmental compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming CECO Environmental's revenue will grow by 16.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.7% today to 9.1% in 3 years time.
• The bullish analysts expect earnings to reach $115.9 million (and earnings per share of $2.99) by about April 2029, up from $13.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 42.8x on those 2029 earnings, down from 195.0x today. This future PE is greater than the current PE for the US Machinery industry at 27.6x.
• The bullish analysts expect the number of shares outstanding to grow by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.56%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• CECO leans heavily on very large natural gas power generation and infrastructure projects. A long term shift in energy policy, regulation or customer preference away from gas fired capacity could reduce new project awards and repowering work, which would pressure long term orders, revenue and ultimately earnings.
• The Thermon combination is expected to bring US$40 million of cost synergies and additional commercial benefits. However, large integrations can face cultural, systems and execution issues that limit synergy capture or create one off expenses, which would weigh on net margins and earnings even if revenue remains solid.
• Management highlights industrial water, semiconductor, electronics and U.S. reshoring as attractive growth themes. Yet CECO is still building its position in several of these areas, and any slowdown in long cycle capital spending, project deferrals or weaker than expected market development would limit conversion of the US$7.3b pipeline, which would affect revenue growth and EBITDA.
• CECO is increasingly tied to complex, multi year engineered projects with long lead times and large contract assets. Any project execution missteps, cost inflation that is not fully recovered through contract escalators, or supply chain issues despite current efforts to secure redundancy could erode gross margins and compress earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for CECO Environmental is $103.0, which represents up to two standard deviations above the consensus price target of $86.67. This valuation is based on what can be assumed as the expectations of CECO Environmental's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $103.0, and the most bearish reporting a price target of just $68.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $1.3 billion, earnings will come to $115.9 million, and it would be trading on a PE ratio of 42.8x, assuming you use a discount rate of 8.6%.
• Given the current share price of $74.29, the analyst price target of $103.0 is 27.9% 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.