Ecolab BUY

ECL : NYSE : US$104.83

Target: US$120.00 

Based in St. Paul, Minnesota, Ecolab is a leading
international provider of advanced technologies and
services helping to optimize the use of resources such as
water, energy, food and the environment.


Transportation and Industrials — Industrial Technologies
Investment recommendation
We find Ecolab very well positioned to benefit from the convergence of
population growth, resource volatility and rapid industrialization across
the world. The company’s recurring services model drives high visibility
(even in an uncertain macro environment), along with an impressive
expansion into Energy. Maintain BUY.
Investment highlights
 Merger synergies and European margin enhancement efforts are
tracking to plan (with several significant wins this quarter), while
Energy continues to shine (strong new business activity supports
better organic growth in H2/14). Next catalyst with booth tour at
upcoming restaurant show in Chicago (5/19).
 Expansion of the 3D TRASAR platform into industrial looks to gain
momentum moving through the year (CIP, solids, etc.), representing
a nice potential upsell opportunity for existing accounts (as new
product focus continues to help drive share gains and mitigate
inflation). ‘14E guidance gets reiterated at $4.10-$4.20, with Q2
targeted at ~$1.00-$1.04 (16-21% growth vs. tough comparison).
 Our ’14 estimates adjust to reflect results, with F2014 going to
$14.5B/$4.20 from $14.5B/$4.18; F2015 stays at $15.5B/$4.83.
Our 12 month target of $120 equates to an EV/EBITDA multiple of
~13.6x our 2015 estimate.
Global macroeconomic conditions, seasonal sales patterns, commodity
costs, competition, regulatory dynamics and M&A integration.


Hexcel Update

HXL : NYSE : US$42.80
Target: US$50.00

Hexcel is a leading supplier of advanced composites for
the commercial aerospace, defense, space and industrial
markets. Specific product offerings include carbon fibers,
specialty reinforcements, prepregs, fiber-reinforced
matrix materials, honeycomb, adhesives, and composite
All amounts in US$ unless otherwise noted.

Transportation and Industrials — Airlines and Aerospace
Investment recommendation
Hexcel reported a basically in-line Q4/13. However, the lack of any upside
surprise was an excuse on a down day in the market to take profits, with
HXL down 7.0% as compared to 2.1% for the S&P 500 and 3.4% for the A&D
sector. The sell-off was overdone, in our view. Hexcel maintained its 2014
guidance and we see upside from better-than-expected execution and the
A350 ramp, which we expect will drive revenue and margin upside. We are
maintaining our BUY rating and $50 price target, and HXL remains one of
our top picks for 2014.
Investment highlights
 The company has maintained its full year 2014 outlook and we have
increased confidence in upside to the 2014 23% incremental margin
target. We currently model in a 27% target. Clearly, continued volume
growth is the key, with the A350 schedule largely driving the 2014 and
2015 performance. We see total growth of over 10%, with commercial
aerospace sales up 13%. We continue to be confident in the Industrial
and Space/Defense segments each up mid-single digits.
 We are slightly reducing our 2014 EPS estimate to $2.14 (slightly higher
tax), and raising our 2015 EPS estimate to $2.45. We are also initiating
a 2016 EPS estimate of $2.80. Seasonally, Q1/14 will be the softest due
to the spike in SG&A spend for employee compensation, but we expect
the strength of the A350 to offset the seasonal weakness in Q4/14.
Our $50 price target is based on the average of a 22.5x EPS multiple and a
14.0x EBITDA multiple applied to our 2014 estimates. We believe HXL will
continue to justify a premium to the sector based on the secular composite
growth, better-than-expected execution, and cash deployment, and the
improving outlook for wind sales into 2014.

EXA Corporation BUY

Exa Corporation

EXA : NASDAQ : US$13.69
Target: US$16.00

Exa is the leading provider of simulation software to the
ground transportation industry. The firm’s technology is
used by more than 90 global vehicle manufacturers to
help design efficient products via digital prototype. Exa
was founded in 1991, went public in June of 2012, and
is headquartered in Burlington, MA.
All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Applications
Exa’s valuation is cheap enough and the firm’s business, which is basically
high fidelity fluid simulation, is seeing sufficient demand that we believe it is
reasonable for the firm to at least hit our estimates. If that happens, the most
likely baseline appreciation for the stock should be somewhere between
revenue and free cash flow growth, or about 15%. Exa would have to put up
some more “no drama” quarters before we would make the case, but if they do
so, you could make the case for a multiple expansion in the back half of 2014
as 2015 comes into view, which could propel the stock towards $20, which is
above our current price target (there are also obvious downsides if the firm
misses numbers, which we assume any investor with more than five minutes of
experience understands). Reiterate BUY.
 A nice quarter: return to double digit growth. Exa reported revenues and
adjusted EBITDA of $14.1M (+12% y-o-y) and $1.6M (11% margin), which
were respectively $0.4M and $0.1M ahead of our estimates. Non-GAAP
EPS of $0.05 was ahead of our $0.04 estimate, and YTD Exa has generated
operating cash flow of $4.4M compared to a ($4.1M) loss a year ago.
 Color from the call. Project activity in the passenger car segment has
gained momentum over the last two quarters, and Exa noted some early
renewal activity ahead of normal Q4 seasonality. While aerospace is
becoming a more meaningful contributor, the truck and off-highway
markets are showing little growth globally.
 Outlook:

A wide range, but in line for Q4. Management suggested that the firm will invest for growth if activity remains at current levels, so we have proactively trimmed our F2015 profit expectations. The firm’s goal remains to return organic revenue growth to the 15-20% range.