ECL Ecolab Inc

Ecolab’s (ECL) second-quarter fiscal 2011 earnings per share of 64 cents met the Zacks Consensus Estimate while profit fell as charges associated with the European restructuring more than offset the double-digit growth in top line.

Second Quarter Flashback

Profit (attributable to Ecolab) for the quarter dipped 2.6% year over year to $125.9 million hit by sizable charges associated with the company’s European restructuring program. Revenues spiked 11.7% to $1,698.8 million, beating the Zacks Consensus Estimate of $1,654 million. 

Revenues were boosted by healthy sales across the company’s U.S. Cleaning & Sanitizing business as well as Asia-Pacific and Latin American operations, backed by acquisitions and favorable currency exchange translation. The Minnesota-based company raised its earnings forecast for fiscal 2011.

We have discussed the quarterly results at length here: Ecolab's 2Q EPS Meets, Ups View.

Agreement – Estimate Revisions

Estimates for Ecolab are trending upwards following the second quarter results, reflecting a sheer directional consensus. Out of 16 analysts covering the stock, 8 and 13 have raised their forecasts for fiscal 2011 over the past week and month, respectively, with no negative revisions.

On a similar note, 6 and 11 (out of 16) analysts have hiked their forecasts for fiscal 2012 over the last 7 and 30 days, respectively, with none moving in the opposite direction. The bullishness, in part, reflects the company’s upward revision of earnings guidance.

Magnitude – Consensus Estimate Trend

Given the directional pressure from the positive revisions, estimates for fiscal 2011 and 2012 have gone up by 2 cents and 3 cents, respectively, over the last 7 days. The current Zacks Consensus Estimates for fiscal 2011 and 2012 are $2.55 and $2.94, respectively.

Neutral on Ecolab

Ecolab leads in cleaning, sanitizing, pest elimination and food safety solutions with annual sales of roughly $6 billion. The company is investing in strategic areas such as product innovation and sales organization while rationalizing operating costs to enhance margins. The company remains focused on bringing new technologies aimed at reducing food safety risks.

Ecolab’s strong international presence has boosted its growth and we believe will continue doing so in the upcoming reporting periods, buoyed by emerging markets. Asia-Pacific and Latin America represent the key growth engine for the company’s overseas operations. Moreover, the uptick in hotel lodging demand and favorable market trends across the food and beverage and healthcare segments are strong opportunities.

Ecolab is also active on the acquisition front and continues to explore opportunities to expand into emerging markets. The recent move to buy Nalco Holding (NLC) is a strategic fit and highly complementary for the company, enabling it to bolster its water management business. Synergies from acquisitions should contribute to the company’s bottom line in 2011.

To drive efficiency and profitability, Ecolab is restructuring its European business. The company expects savings from the restructuring to benefit its second-half 2011 results, including opportunities for meaningful margin expansion. Moreover, Ecolab remains committed to deliver incremental returns to investors leveraging a solid balance sheet and healthy cash flows.

The company has raised its earnings forecast for 2011 and expects quarterly profit in the second half to be boosted by higher sales volume, pricing, margin leverage, new products as well as synergies from acquisitions and European restructuring.

While we derive comfort from Ecolab’s strong international exposure (especially in emerging markets) and recovery across its end-markets, aggressive competition remains a concern. The company’s U.S. Cleaning & Sanitizing and International divisions face stiff competition from Clorox (CLX) and Church & Dwight (CHD).

Although Ecolab is employing effective pricing strategies to offset the raw material inflation, raw material costs are expected to remain a headwind in the third quarter. We are also cognizant about the potential dilutive impact of the hefty restructuring expenses on the company’s bottom line. The company’s back-to-back acquisitions could also lead to substantial integration risk. We are currently Neutral on the stock.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.

 
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