Ecolab’s (ECL) third-quarter fiscal 2011 earnings per share of 75 cents were in line with the Zacks Consensus Estimate. Profit clipped 11% year over year as double-digit growth in sales was eclipsed by charges associated with the company’s European restructuring and acquisition.
Third Quarter Highlights
Revenues for the quarter shot up 11% year over year to $1,736.1 million, meeting the Zacks Consensus Estimate. Sales were boosted by healthy growth at the Minnesota-based company’s Food & Beverage business coupled with contributions from Asia-Pacific, Canada and Latin American operations. Acquisitions and new products also aided the growth.
Hefty restructuring charges contributed to the decline in margins. The company tightened its earnings forecast for fiscal 2011. The adjusted earnings exclude charges associated with the acquisition of Nalco Holding (NLC), which the company expects to close in fourth-quarter 2011.
Ecolab expects profit in the fourth quarter to be boosted by higher sales volume, pricing, margin leverage, new products as well as synergies from acquisitions and European restructuring.
We have discussed the quarterly results at length here: Ecolab Meets, Charges Hurts Profit.
Agreement – Estimate Revisions
Estimates for Ecolab reflect bearish reactions from analysts to the third quarter results. Out of 13 analysts covering the stock, 6 have truncated their forecasts for the fourth quarter over the past month with no positive revisions.
Estimates for fiscal 2011 are inclined towards the negative side with 4 (out of 15) analysts having lowered their projections over the last 30 days with just one raising his/her forecast. The bearishness, in part, reflects the company’s guidance revision. There were, however, absolutely no movements in the estimates for the fourth quarter and fiscal 2011 over the past week.
Magnitude – Consensus Estimate Trend
Given the directional pressure from the downward revisions, estimate for fiscal 2011 has moved down by a penny over the last 30 days while remaining static over the past week. Estimate for the fourth quarter (of 71 cents) has been torpid over the past week and month.
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. Moreover, Ecolab 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 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. The company’s move to buy Nalco Holding represents a strategic fit, enabling it to bolster its water management business.
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. Moreover, Ecolab remains committed to delivering incremental returns to investors leveraging a solid balance sheet and healthy cash flows.
While we derive comfort from Ecolab’s strong international exposure and recovery across its end-markets, we remain cautious about aggressive competition and 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).
Although Ecolab is employing effective pricing strategies to offset raw material inflation, raw material costs are expected to remain a headwind in 2011. We are also aware of the 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. As such, we remain Neutral on the stock, which is supported by a short-term Zacks #3 Rank (Hold).
About Earnings Estimate Scorecard
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