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CTEI: Zacks initiates coverage of Cemtrex with a Buy rating

By Steven Ralston, CFA

OBB:CTEI

Zacks initiates coverage of Cemtrex Inc. (CTEI) with a Buy rating and a target of $6.85. Cemtrex is a diversified industrial equipment company that manufactures a range of engineered products and systems. The company operates two business segments: Electronic Manufacturing Services and Environmental Products & Systems. The Electronic Manufacturing Services (63% of revenues in fiscal 2014) segment is composed of ROB Cemtrex GmbH, which offers contract electronic manufacturing services to original equipment manufacturers (OEMs). The Environmental Products & Systems (37%) sells air filtration and environmental control products through Griffin Filters and designs, assembles and sells emission monitors and systems for measurement of emissions of regulated air pollutants and also markets monitoring and analysis equipment for gas and liquid measurement for the oil & gas industry.

Cemtrex has achieved remarkable sales growth over the last five years by targeting markets poised for growth and through astute acquisitions. The company is well-positioned to benefit from the trends of outsourcing in the electronic contract manufacturing industry (ROB Cemtrex GmbH) and of enforcing regulations designed to reduce air pollution (Environmental Products & Systems segment).

Management is committed to growing Cemtrex, both organically and through acquisitions. The company has achieved 5-year top-line growth at a 46.9% CAGR. Cemtrex’s impressive top-line growth has been achieved primarily through acquisitions. Through the process of creating and expanding the company, extremely robust revenue growth has been achieved, which has been recognized by two organizations. In November 2012, Cemtrex became a member of Deloitte's Technology Fast 500™, a ranking of the 500 fastest-growing technology, media, telecommunication, life sciences and clean technology companies in North America. More recently, on April 1, 2015, Cemtrex was included in the Richmond Club Index, an index of public companies that pass a rigorous, three-step fundamental analysis process.

Cemtrex achieved profitability in mid-2010, and since has remained profitable every quarter. Initially (from 2004 to 2012), management concentrated on environmental control systems and technologies that directly benefit from governmental pollution control regulations. In 2013, management opportunistically acquired the ROB Group, an electronics design and manufacturing company in Germany, at an extremely attractive valuation. The acquisition increased the company’s sales base by approximately 200%. Subsequently, the subsidiary was renamed ROB Cemtrex GmbH and now operates as a subsidiary of Cemtrex within the Electronic Manufacturing Services segment.

Over the last five years, very few new shares have been issued, which is rare in the small cap universe. Shares outstanding have only increased 154,878 shares (or 2.2%) from 6,620,477 to 6,774,855 shares since September 2009. Capital has been raised primarily through the issuance of notes, and more recently though bank loans, mortgages and convertible notes in order to acquire and support ROB Cemtrex GmbH.

The valuation methodology for pollution control and related companies, including contract manufacturers, usually is based on the use of EV-to-EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization) reflecting the industry’s characteristics of profitability and cash flow generation. This classic valuation parameter is known to be the highest correlated metric and relatively reliable determinant of stock price in the Cemtrex’s company universe. Though the risks associated with newer, smaller companies, such as Cemtrex, are greater than that for more established companies with longer track records, in our view, so are the growth prospects. Comparable pollution control and related companies have gross margins in the 30% range and have an average EV/EBITDA ratio of 16.0. Utilizing the average EV/EBITDA ratio of 16.0 on trailing twelve-month (TTM) EBITDA, our share price target is $6.85

We are optimistic about Cemtrex. The company should experience an increase in revenues over the next few years as management pursues opportunities in the contract manufacturing industry and seeks to make accretive acquisitions.

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