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Calgon Carbon Corporation (NYSE:CCC) is slated to release its fourth-quarter 2010 results on Thursday, February 24 after the market closes. The current Zacks Consensus Estimate for the fourth quarter is 17 cents, representing an annualized decline of 27.39%.

With respect to earnings surprise, over the trailing four quarters, Calgon Carbon has outperformed the Zacks Consensus Estimate in three out of the four quarters. The average earnings surprise was a positive 19.50%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Third-Quarter Performance

On November 9, Calgon Carbon reported its third quarter fiscal 2010 results. Reported net income was $10 million or 18 cents per share in the third quarter of 2010 compared with 25 cents in the year-ago quarter. Reported earnings were in line with the Zacks Consensus Estimate.

Sales in the quarter accelerated 15.7% to $124.4 million. The increase was mainly attributable to the three acquisitions completed by the company in the first half of 2010.

Sales in Calgon Carbon's biggest segment, Activated Carbon and Service, surged 16.7% to $110 million in the reported quarter. The increase was primarily attributed to the higher demand for activated carbon products in environmental air treatment, industrial process, respirator, and food markets. However, the increased sales were offset by a lower demand for activated carbon products in the potable water market.

Equipment segment sales shot up 14.7% to $12.1 million driven by higher revenue from traditional carbon adsorption equipment. However, Consumer segment sales for the quarter declined 16.4% to $2.3 million due to lower demand for PreZerve products and carbon cloth.

Agreement of Estimate Revisions

In the last 30 days, out of the 10 analysts covering the stock, none of the analysts increased or decreased their EPS estimates, for the fourth quarter of fiscal 2010.

In the last 30 days, out of the 10 analysts covering the stock, none revised their EPS estimates upwards or downwards for fiscal 2010. Similarly, for fiscal 2011, out of the 10 analysts covering the stock, none revised their EPS estimates upwards or downwards.

Magnitude of Estimate Revisions

In accordance with the flat trend, earnings estimates for the fourth quarter, in the last 30 days, remained constant at 17 cents. Similarly, for fiscal year 2010 and 2011, the earnings estimate revision remained flat at 55 cents and 87 cents, respectively.

Calgon Carbon currently has a market share of 25% to 33% in total ultraviolet (UV)-treated drinking water. We expect the company to realize substantial top- and bottom-line growth as this market matures and order activity increases over the next four years. The Long Term 2 Enhanced Surface Water Treatment Rule regulations mandates that the UV technology remain in place, as does the deadline of 2013 for compliance. In 2012, UV sales to the U.S. should be substantial, as water utilities scramble to purchase the necessary equipment to meet the 2013 deadline. Through its recent Hyde Marine acquisition in Ohio, Calgon has ventured into the global market for ballast water treatment using UV technology. Calgon targets about $10 billion in revenues from the global markets. In addition, Calgon acquired a 2.4 million contract from Cincinnati, Ohio to provide an ultraviolet disinfection system, which would treat about 240 million gallons of drinking water per day.

Our Take

Calgon Carbon is a leader in the activated carbon sector, but faces weak demand for carbon products. The insipid global economy hurt volumes in 2009, a trend that is expected to persist in the near term. Though activated carbon sales recovered to certain extent in the last reported quarter, we are skeptical about its sustainability. We expect sales volumes in the segment to remain challenging in 2010 as the end-markets are yet to recover fully. However, declining volumes are expected to be partially offset by higher sales for carbon products used to remove mercury from the flue gas of coal-fired power plants in the U.S. This momentum, combined with improved drinking water end-markets and strong pricing, could drive 2010.

Calgon Carbonfaces stiff competition from MeadWestvaco Corporation (NYSE:MWV) and ITT Water & Wastewater Herford GmbH (privately held).

We maintain our long-term Neutral recommendation for Calgon Carbon. Currently, it holds a short-term Zacks # 3 Rank (Hold) on the stock.

Source: Calgon Carbon: Earnings Preview