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Leading cleaning and sanitation products maker Ecolab Inc. (NYSE:ECL) is scheduled to reveal its fourth-quarter fiscal 2011 results before the opening gong on Tuesday, February 28. The Minnesota-based company envisions adjusted earnings between 69 cents and 71 cents a share for the quarter.

The forecast assumes a dilution of roughly 20 cents a share, primarily associated with merger and integration costs related to the company’s buyout of water treatment company Nalco Holding. Analysts polled by Zacks are currently looking for revenues and earnings per share of $1,934 million and 70 cents, respectively, for the quarter.

With respect to earnings surprises, Ecolab has met the Zacks Consensus Estimates in the last two quarters while it has beaten and trailed the estimates on two other occasions. Ecolab has produced an average positive earnings surprise of 0.32% over the last four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure.

Third Quarter Flashback

Ecolab’s third quarter earnings per share of 75 cents were in line with the Zacks Consensus Estimate. Profit fell 11% year over year as double-digit growth in sales was eclipsed by charges associated with the company’s European restructuring and acquisition.

Revenues for the quarter climbed 11% year over year to $1,736.1 million, matching the Zacks Consensus Estimate. Sales were boosted by healthy growth at the company’s Food & Beverage business coupled with contributions from Asia-Pacific, Canada and Latin American operations. Acquisitions and new products also aided growth.

Hefty restructuring charges contributed to the decline in margins. The company tightened its earnings forecast for fiscal 2011.

Estimate Revisions Trend

Agreement

Estimates for the December quarter elicit an absolute lack of activity with no movements in either direction over the last week and month. An identical trend applies for the estimates for fiscal 2011.

Magnitude

Given the lack of analyst revision, estimates for the fourth quarter and fiscal 2011 have been stationary over the last 7 and 30 days. The current Zacks Consensus Estimate for 2011 is $2.54, representing an estimated year-over-year growth of 14.01%.

Our View

Ecolab’s strong international presence has been driving growth and we believe will continue doing so in the December quarter, 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.

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.

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, would fetch annual cost savings of more than $120 million. Ecolab also 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 wary 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 (NYSE:CHD).

Although Ecolab is employing effective pricing strategies to offset raw material inflation, raw material costs are expected to impact results in the fourth quarter. We are also aware of the dilutive impact of the hefty restructuring expenses on the company’s bottom line. Our Neutral recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).

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Source: Ecolab: Earnings Preview