CBLUY China Bluechemical Ltd (PK)

Ecolab Inc.’s (ECL) earnings per share (excluding special gains and charges and discrete tax items) of $1.04 for the third quarter of 2013 were 3 cents ahead of the Zacks Consensus Estimate. It represented a 20% surge from the year-ago earnings of 87 cents per share on the back of solid top-line growth, cost efficiency programs and synergies as well as improved margins in Europe.

Earnings were within the company’s previously announced guidance of $1.00–$1.05 per share. Net income attributable to Ecolab in the reported quarter increased to $308.0 million or $1.00 per share from $238 million or 80 cents per share in the year-ago quarter.

Revenues grew 15% to $3,484.0 million in the quarter, slightly missing the Zacks Consensus Estimate of $3,543 million. Ecolab’s acquisition-adjusted fixed currency revenues increased 5% in the third quarter, driven by strong sales in Global Specialty and Global Energy businesses. On a geographic basis, the company garnered significant revenues from the Latin American region.

Gross margin decreased 50 basis points (bps) to 46.0% in the third quarter. Selling, general and administrative expenses (SG&A) increased 12.0% to $1,097.4 million. However, adjusted operating margin improved 30 bps to 14.6%. At CER, adjusted operating margin rose 40 bps to 14.7%.

Segment Analysis

In the third quarter, ECL shifted intangible asset amortization specific to the Champion transaction from the Corporate segment to the Global Energy reportable segment. This shift resulted in $14 million of amortization expense moving from the former to the latter. No other segments were impacted by this change.

Revenues from Global Industrial segment grew 3% to $1,261.1 million driven by strong sales in the Global Food & Beverage and Global Paper businesses. Sales growth was solid in Latin America and Asia-Pacific, while North America posted moderate gains. However, sales in Europe, the Middle East and Africa (EMEA) declined in the reported quarter.

Revenues from the Global Institutional segment increased 5% to $1,099.2 million on the back of healthy Global Specialty and Global Healthcare sales. Regionally, North America and Latin America generated strong sales, with modest growth in Asia Pacific. This was partially offset by soft sales in the EMEA region.

The Global Energy segment posted solid revenues of $990.6 million, which grew 68% year over year. Acquisition-adjusted fixed currency revenues increased 9%, as growth in the upstream and downstream markets was partially offset by comparison to a strong quarter last year, which included significant non-annuity dispersant sales.

Revenues from the Other segment dropped 3% to $185.0 million. After adjusting for the divestment of Vehicle Care in the fourth quarter of 2012, fixed currency sales in the third quarter increased 6%. The upside was driven by gains from Global Pest Elimination and Equipment Care businesses.

Balance Sheet

Ecolab exited the third quarter with cash and cash equivalents of $394.4 million, up 21.7% from $324.0 million as of Sep 30, 2012. Long-tem debt increased 21.4% to $6,537.3 million from $5,386.7 as of Sep 30, 2012.

Guidance

Ecolab narrowed its 2013 adjusted EPS guidance to the range of $3.51−$3.55 from the earlier guidance of $3.48−$3.56, representing 18−19% (earlier 17–19%) earnings growth. The current Zacks Consensus Estimate for 2013 is pegged at $3.53, which lies within the guided range.

Special gains and charges (including restructuring charges, integration expenses along with costs associated with the Venezuelan devaluation charge and discrete tax items) are expected to be roughly 35 cents (earlier 45 cents) a share for 2013.

For fourth-quarter 2013, adjusted earnings are expected in the range of $1.01–$1.05 per share, up 13% to 18% year over year. The current Zacks Consensus Estimate of $1.04 lies closer to the higher end of the predicted range.

ECL reiterated its anticipation for full year adjusted gross margin and SG&A expenses. Adjusted gross margin is expected to be roughly 46% and SG&A, as a percentage of sales, is anticipated to be roughly between 31% and 32%.

Further, Ecolab expects to incur extraordinary items amounting to 8 cents per share in the fourth quarter, mainly related to special gains and charges along with integration charges and restructuring costs.

Our Take

This was the third consecutive quarter in which Ecolab’s revenues missed the Zacks Consensus Estimate, despite growing at a double digit rate. However, we note that the company managed to maintain its bottom-line growth. In addition, improvement in operating margin further reinstates our confidence in management’s ability to leverage operational efficiency.

With a background of robust growth, ECL is poised to gain momentum via its aggressive strategy of pursuing acquisitions. Although we are impressed by Ecolab’s strong international exposure, we remain cautious about aggressive competition. Challenging economic and market trends in 2013 together with unfavorable internal issues will likely act as near-term headwinds for the company. Raw material price inflation also remains a cause of concern.

Ecolab currently carries a Zacks Rank #3 (Hold). While we remain on the sidelines regarding Ecolab, chemical specialty companies such as Ferro Corp. (FOE) and Globe Specialty Metals, Inc. (GSM), both carrying a Zacks Rank #1 (Strong Buy) are expected to do well. CHINA BLUECHIP ADR (CBLUY) from the basic material sector with a Zacks Rank #1 (Strong Buy) is also noteworthy.
 

 
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