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Leading cleaning and sanitation products company Ecolab Inc (ECL) is expected to release its third-quarter fiscal 2010 results on Tuesday, October 26.

In its second quarter earnings call, the company stated that it anticipates sustained top-line improvement (in constant currency) in the third quarter. However, currency exchange translation is expected to unfavorably impact revenues and earnings for the quarter.

Ecolab expects adjusted earnings in the range of 64 cents to 66 cents per share for the third quarter. With respect to earnings surprise, the company’s performance has been erratic over the preceding four quarters.

Ecolab has posted two positive surprises over the last four quarters, while it has trailed and met the Zacks Consensus Estimate on the other two occasions, respectively. The current Zacks Consensus Estimate for the third quarter is 65 cents, representing an estimated 6.97% annualized growth.

Second-Quarter Highlights
Ecolab’s second-quarter fiscal 2010 revenues (of $1.52 billion) and adjusted earnings (of 56 cents) matched the Zacks Consensus Estimate. Net income soared 30% year-over-year driven by strong performances across Asia-Pacific and Latin America, favorable foreign exchange translation, as well as lower delivered product costs and cost-cutting initiatives.

Revenues rose 5% year-over-year, supported by new account gains, recovery across end-markets and international growth. Ecolab's US Cleaning & Sanitizing operation sales grew 3% year-over-year to $689 million.Revenues from International operations rose 5% year-over-year to $750 million, supported by slowly recovering end-markets. Lower raw material input costs have fuelled the expansion in gross margin.

Estimate Revisions Trend

Agreement

Estimates for Ecolab for the upcoming quarter manifest lack of activity over the past week and month. Out of 16 analysts covering the stock, none have made any estimate revisions in either direction over these time periods. A similar trend applies to fiscal 2010. The lack of estimate revisions reflects foreign exchange headwinds and modest raw material pricing pressure, which have offset improving demand trends across core service markets.

Magnitude

Given the lack of revisions, the magnitude of estimate revisions for the forthcoming quarter has been static over the last 7 and 30 days. Likewise, estimates for 2010 have plateaued over the last week and month. The current Zacks Consensus Estimate for 2010 is $2.24, reflecting an estimated year-over-year growth of 12.53%.

Neutral on Ecolab

Ecolab caters products and services for the hospitality, foodservice, institutional and industrial markets. It leads in cleaning, sanitizing, pest elimination and food safety solutions with revenues of $6 billion.

The company continues to invest in strategic areas such as product innovation, sales organization and healthcare while rationalizing operating costs to boost margins. In addition, Ecolab remains focused on bringing new products/technologies and is fortifying its relationships with distributors in core markets.

In a move to broaden its Asia-Pacific reach, Ecolab recently agreed to acquire Australian cleaning and hygiene products maker Cleantec, a unit of Brisbane-based diversified industrial services company Campbell Brothers Ltd. Ecolab also acquired the commercial laundry business of Illinois-based privately-held Dober Chemical, which has boosted its North American commercial laundry operation.

The food services market, one of Ecolabs’ mainstays, is recovering slowly across the U.S. and Europe. The company is expected to benefit from the uptick in hotel lodging demand and favorable market trends across food and beverage and healthcare segments.

Although we are impressed by Ecolab’s strong international exposure, we remain concerned about intense competition. Moreover, Ecolab’s aggressive acquisition strategy has inherent integration risks.

Ecolab’s international sales are susceptible to foreign exchange headwinds. Also, raw material price fluctuations may weigh on its operating results for the remainder of fiscal 2010. This is reflected in our long-term Neutral recommendation for the stock. Ecolab currently retains a Zacks #4 Rank, which translates into a short-term Sell recommendation.

Source: Ecolab: Earnings Preview

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