Earnings Scorecard: Ecolab - Analyst Blog
March 06 2012 - 9:15AM
Zacks
Ecolab’s (ECL)
fourth-quarter fiscal 2011 adjusted earnings per share of 70 cents
matched the Zacks Consensus Estimate. Profit tumbled 32% year over
year as double-digit growth in sales was masked by charges
associated with the company’s $8.3 billion acquisition of
Illinois-based water treatment company Nalco Holding and
restructuring program.
Highlights from the
Quarter
Net sales surged roughly 17% year
over year to a record $1,845.3 million, yet missed the Zacks
Consensus Estimate of $1,934 million. Sales were boosted by the
company’s Food & Beverage and Kay businesses coupled with the
contributions from the Latin American operation and Nalco
acquisition.
Gross margin fell year over year on
account of inventory step-up cost associated with the Nalco buyout
while operating margin was hit by the hefty restructuring and
acquisition-related charges.
The Minnesota-based company
reaffirmed its earnings forecast for fiscal 2012 and initiated
guidance for the first quarter which was below the Zacks Consensus
Estimate.
We have discussed the quarterly
results at length here: Ecolab's EPS Meets, Sales Lag.
Agreement – Estimate
Revisions
Estimate for fiscal 2012 is evenly
balanced with 2 analysts (out of 15) having lowered their forecasts
over the past month with a couple of positive revisions. Over the
past week, there were 2 positive revisions accompanied by a single
downward movement.
Estimate for first-quarter 2012
elicit a comprehensive downward drift with 5 analysts (out of 11)
having slashed their forecasts over the last week and month with
none moving in the opposite direction over these periods.
Estimates for fiscal 2013 are
inclined towards the negative side with 4 analysts (out of 12)
having trimmed their projections over the last 7 and 30 days with
just one raising his/her forecast over these timelines.
Magnitude – Consensus
Estimate Trend
Given the lack of directional
pressure, estimate for fiscal 2012 has remained static (at $3.02)
over the last 7 and 30 days. However, due to the downward
revisions, estimates for first-quarter 2012 and fiscal 2013 have
been reduced by 6 cents each over the past week and month.
Our Take
Ecolab leads in cleaning,
sanitizing, pest elimination and food safety solutions with annual
sales of roughly $6.8 billion. The company is investing in
strategic areas such as product innovation and sales organization
while rationalizing operating costs to enhance margins.
We believe that Ecolab’s strong
international presence will continue to boost its growth 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 food and beverage market trends
represents healthy tailwinds.
Management remains optimistic
regarding improvement in end-market demand, its ability to attract
new customers, and opportunities for greater customer penetration
through new product development. Ecolab is also active on the
acquisition front and continues to explore opportunities to expand
into emerging markets.
To drive efficiency and
profitability, Ecolab is restructuring its European business. The
restructuring, once completed, has been projected to fetch annual
cost saving of more than $120 million.
Ecolab is also employing
appropriate pricing strategy to offset higher delivered product
costs. Moreover, the company remains committed to delivering
incremental returns to investors leveraging a solid balance sheet
and healthy cash flows.
Ecolab expects profit in the first
quarter and fiscal 2012 to be boosted by higher sales volume,
pricing, margin leverage, new products as well as synergies from
acquisitions and restructuring.
However, we remain cautious about
aggressive competition and the impact of foreign exchange movements
on overseas sales. The company’s U.S. Cleaning & Sanitizing and
International divisions face stiff competition from
Clorox (CLX) and Church &
Dwight (CHD).
Moreover, raw material costs are
expected to remain a headwind moving ahead. We are also aware of
the dilutive impact of the restructuring expenses on the company’s
bottom line. The company’s back-to-back acquisitions could also
lead to substantial integration risk. As such, we remain Neutral on
the stock, which is backed by a short-term Zacks #3 Rank
(Hold).
About Earnings Estimate
Scorecard
As a PhD from MIT, Len Zacks
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/
CHURCH & DWIGHT (CHD): Free Stock Analysis Report
CLOROX CO (CLX): Free Stock Analysis Report
ECOLAB INC (ECL): Free Stock Analysis Report
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