According to Stocktwits' Trends with No Friends newsletter, 69 stocks hit 52-week highs yesterday compared to 27 hitting 52-week lows.
Among the 69, two industrials stocks were pushing higher on Tuesday. Both are in the pollution and treatment controls industry. CECO Environmental (CECO) and Zurn Elkay Water Solutions (ZWS) were the stocks. The former has a $2.4 billion market cap, while the latter’s is $6.88 billion, more than three times larger.
On the assumption that bigger is better, Zurn Elkay is the better bet.
However, before you buy shares of ZWS stock, consider the smaller CECO for your portfolio.
What’s Got Investors Excited About CECO Environmental?
Although the company's history dates back to 1869, the modern-day story began in 1979 under the name Claremont Engineering. It changed its name to CECO Environmental in 1997. Several acquisitions and 27 years later, it is a company with 2023 annual revenue of $545 million and $58 million in EBITDA (earnings before interest, taxes, depreciation and amortization).
The company’s 10-K states, “We help companies grow their businesses with safe, clean, and more efficient solutions that help protect people, the environment and industrial equipment.”
Based in Dallas, it has customers worldwide, with approximately 40% of its sales outside the U.S. It operates two segments: Engineered Systems (66% of revenue) and Industrial Process Solutions (34%).
A few years ago, the company moved to transform its portfolio of businesses. The intent was to strengthen some of these businesses through strategic investments and value-enhancing acquisitions.
As a result, it has established positions in Industrial Air, Industrial Water, and the Energy Transition, and it’s only getting started.
Its Q3 2024 Results Were a Mixed Bag
At the end of October, CECO reported its Q3 2024 results. They were a mixed bag.
It reported a record backlog of $437.5 million and orders of $162.3 million, 12% higher than a year ago. The bad news was that revenues fell 9% year over year to $135.5 million, while its adjusted EBITDA of $14.3 million was 5% lower than Q3 2023.
The company’s CEO, Todd Gleason, said in the Q3 2024 press release that some of its customers had delays on some of their larger projects, which pushed some revenue into the fourth quarter and 2025. As a result, it missed its guidance for sales and income in the quarter.
In 2024, it expects top-line revenue of $587.50 at the midpoint of its guidance, down from $610 million previously but still 10% higher than in 2023. Adjusted EBITDA will be $67.5 million at the midpoint, down from $70 million previously but 17% higher than in 2023.
In 2025, it expects $725 million in revenue, 25% higher than 2024, and $95 million in adjusted EBITDA, 40% higher year over year.
So, it’s currently valued at 3.3x its 2025 revenue and 25.3x adjusted EBITDA.
How Does It Compare to Zurn Elkay?
I can remember Zurn when it was called Zurn Industries. It went public in 1961 and was acquired 27 years later by Jacuzzi Brands (the hot tub people) in 1988.
Both companies were acquired by Apollo Global Management (APO) in 2007, with Zurn acquired by Apollo affiliate Rexnord Corp. In 2021, Rexnord spun off Zurn into its own public company, renamed Zurn Water Solutions.
Zurn Elkay was formed through the July 2022 merger of Zurn Water Solutions and Elkay Manufacturing. Zurn paid nearly $1.6 billion in stock for Elkay. Zurn shareholders would own 71% of the combined entity, and Elkay shareholders would own 29%.
The merger's rationale was to create a greater scale in the water quality and water conservation solutions industry.
In the two years since the merger, the company’s sales have grown by 32% from $1.17 billion in the 12 months ended Sept. 30, 2022, to $1.55 billion as of Sept. 30, 2024. CECO’s revenue in the same 24 months grew 38% from $400 million to $553 million. Both companies saw their EBITDA double over the same timeframe.
According to S&P Global Market Intelligence, Zurn Elkay trades at 4.2x its estimated 2025 revenue of $1.62 billion and 16.7x 2025 EBITDA of $413 million, so the two have similar valuations.
The six analysts covering CECO rate it a Buy (1.50 out of 5), and the seven covering ZWS rate it Outperform (2.38 out of 5).
The Bottom Line
In 2024, both stocks are up more than the markets--75% year-to-date through Dec. 11 for CECO compared to 39% for ZWS--and the same applies over the past five years, with CECO leading the way, up 330%, compared to 149% for ZWS, and 92% for the S&P 500.
Given the worldwide water shortages, I expect that both should outperform the index over the next five years.
While I like both, if I could only buy one, I'd choose the smaller company, CECO Environmental.
Here’s a call option worth considering for CECO stock.
Given its recent upturn—36% in the past month—it only needs to appreciate by 7% to hit your breakeven of $37.50. The ITM (in the money) probability is reasonable at 50%.
The worst-case scenario is a $240 loss. The risk/reward proposition is excellent.
