By Zacks Equity Research

CECO Environmental Corp. (CECE) is a small air pollution control technology company -- only $158.4 million market cap and relatively low average trading volume. The company reported another positive surprise in its third quarter as earnings per share beat the Zacks Consensus Estimate by nearly 27%. This company has been outperforming quarterly expectations for a while now, amassing an average beat of more than 21% in the past four quarters.

This Zacks Rank #1 (strong buy) appears to have potential for even more growth moving forward, given the major booking momentum from North America and international customers, along with its focus on cost-control measures and margin improvement.

Solid third quarter
On Nov 7, 2012, CECO Environmental Corp. reported third-quarter 2012 earnings per share of 19 cents, beating the Zacks Consensus Estimate by 26.7% and last year's earnings by 35.7%.

Revenues grew 0.5% year over year to $33.1 million, driven by a $1.1 million sales increase in the Engineered Equipment Technology and Parts Group (EET&P), offset by a $1.0 million decrease in the Components Parts Group (C/S).

Gross profit for the quarter increased $0.8 million or 8.2% to $10.5 million, compared with $9.7 million in the prior-year period. Gross margin for the quarter stood at 31.7% in 2012, compared with 29.5% in 2011. The increase in gross margin was primarily due to a shift to higher margin work in both the EET&P Group and the C/S Group.

Earnings estimates on the rise
The Zacks Consensus Estimate for 2012 increased 3.2% to 64 cents over the last 60 days, reflecting year-over-year growth of 24.8%. The Zacks Consensus Estimate for 2013 is up 1.4% to 75 cents over the last 90 days, suggesting a year-over-year increase of 18.1%.

Valuation looks reasonable
Currently, CECO Environmental is trading at a premium to its peers based on price-to-earnings, price-to-book and price-to-sales ratios. The premium valuation seems justified given the company's solid earnings growth prospects. Its earnings growth expectation of 13.8% over the next five years compares favorably with the industry average of 6.80%, indicating room for further expansion. Moreover, its return on equity (ROE) of 22.8% is much higher than the peer group average of 1.6%.

The share price has increased at a higher pace than earnings over the last few years. Currently, shares are hovering around $10.00–$11.00. The consensus estimates for 2013 and 2014 are trending upward. The share price should increase at a similar or higher pace than the earnings estimate trend.

Based in Cincinnati, Ohio, CECO Environmental Corp. provides air-pollution control technology products and services worldwide. The company offers engineered equipment, cyclones, scrubbers, dampers, diverters, regenerative thermal oxidizers, component parts and monitoring and managing services.

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