Ecolab: Earnings Preview

| About: Ecolab Inc. (ECL)
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Leading cleaning and sanitation products maker Ecolab Inc (NYSE:ECL) is scheduled to report its second-quarter fiscal 2011 results on July 27. The Minnesota-based company expects adjusted earnings between 62 cents and 64 cents a share.

Ecolab expects improved year-over-year revenue growth in the second quarter. Adjusted gross margin target for the quarter is roughly 50%. The current Zacks Consensus Estimate for revenues and earnings for the second quarter are $1,654 million and 64 cents, respectively.

With respect to earnings surprise, Ecolab’s performance has been erratic over the preceding four quarters. The company has posted two positive surprises over the last four quarters while it has trailed and met the Zacks Consensus Estimates on the other two occasions. Ecolab has produced an average positive earnings surprise 1.24% over the same period, implying that it has beaten the Zacks Consensus Estimate by that measure.

First-Quarter Recap

Ecolab’s first quarter adjusted earnings of 45 cents beat the Zacks Consensus Estimate by a penny while exceeding the year-ago earnings of 41 cents. Profit (attributable to Ecolab) fell 2% year over year to $93.6 million, hit by charges associated with the company’s European restructuring and acquisition as well as higher tax. Revenues climbed 6% to $1,518.3 million, also beating the Zacks Consensus Estimate.

The results were boosted by strong performances across the company’s core U.S. Cleaning & Sanitizing business as well as Asia-Pacific and Latin American operations. Moreover, currency exchange translation had a favorable impact on the results. Ecolab raised its fiscal 2011 adjusted earnings per share guidance.

Estimate Revisions Trend


Estimates for the forthcoming quarter reflect bullishness among the analysts with 5 (out of 11 analysts) having raised their forecasts over the past week and month with no reverse movements. A similar trend applies to the estimates for fiscal 2011 with 7 analysts (out of 14) having lifted their estimates over the corresponding periods with none moving in the opposite direction. The current Zacks Consensus Estimate (of 64 cents) represents an estimated 13.64% year-over-year growth.


The upward revisions coupled with a strong directional consensus have led to a rise in the estimates for the second quarter and fiscal 2011. Estimates for the second quarter as well as fiscal 2011 have increased by a penny over the past 7 and 30 days. The current Zacks Consensus Estimate for 2011 is $2.53, representing an estimated year-over-year growth of 13.52%.

Ecolab in Neutral Lane

Ecolab develops and markets products and services for the hospitality, foodservice, institutional and industrial markets. The company offers cleaning, sanitation, pest elimination, maintenance and repair products as well as systems and services.

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 boost margins.

Ecolab is also active on the acquisition front and continues to explore opportunities to expand into emerging markets for growth. In this regard, we believe that its recent decision to buy Nalco Holding Company (NYSE:NLC) is a strategic fit and highly complementary for the company, enabling it to bolster its water management business. Moreover, Ecolab remains committed to deliver incremental returns to investors leveraging a solid balance sheet and healthy cash flow.

To drive efficiency and profitability, Ecolab is restructuring its European business. The company expects savings from the restructuring to benefit its second-half 2011 results, including opportunities for meaningful margin expansion.

While we are encouraged by Ecolab’s strong international exposure and recovery across its end-markets, we remain concerned about aggressive competition. The company’s U.S. Cleaning & Sanitizing and International divisions face stiff competition from Clorox (NYSE:CLX) and Church & Dwight (NYSE:CHD).

Moreover, raw material price fluctuations represent a headwind for Ecolab and its aggressive acquisition strategy has inherent integration risks. While Ecolab will eventually benefit from the meaningful savings to be realized from its European restructuring program, associated expenses may weigh on its bottom line. We are currently Neutral on the stock.