Second Quarter Revisited
Leading cleaning and sanitation products company Ecolab Inc (ECL) reported second-quarter fiscal 2010 results on July 27 with revenues (of $1.52 billion) and adjusted earnings (of 56 cents) matching 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 grew 5% year over year, supported by new account gains, recovery across the end-markets and international growth. Lower raw material input costs fuelled the expansion in gross margin.
We have discussed the quarterly results at length here: Ecolab Meets Estimates, Reaffirms
Agreement – Estimate Revisions
Estimates for Ecolab are edging towards the negative side following the second quarter results. Out of 17 analysts covering the stock, 4 have truncated their estimates over the past week while 2 have made positive revisions. Likewise, 2 analysts (out of 17) have trimmed their forecasts for fiscal 2011 over the same period with one moving in the reverse direction.
The bearish estimate revisions reflect the impact of currency exchange headwinds on the top and bottom line for the third quarter and modest raw material pricing pressure. Conversely, healthy second quarter earnings coupled with improving demand patterns across the company’s key service markets inspire bullishness in some analysts.
Magnitude – Consensus Estimate Trend
Despite downside pressure from the negative revisions, the magnitude of revisions for fiscal 2010 has remained torpid over the last 7 days. Similar trend applies for fiscal 2011. The current Zacks Consensus Estimate for fiscal 2010 is $2.24, reflecting an estimated year-over-year growth of 12.53%.
Ecolab Stays a “Neutral”
Ecolab develops and markets products and services for the hospitality, foodservice, institutional and industrial markets. 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 fortifying its relationships with distributors in core markets.
Ecolab is operating in a slowly recovering food service market across the U.S. and Europe. Moreover, the company will benefit from the recent uptick in hotel lodging demand and favorable market trends across food and beverage and healthcare segments.
Although we are impressed with Ecolab’s strong international presence, we remain concerned about intense competition as rivals continue to look to grab market share by lowering prices and rolling out new services or services that are different from those offered by the company.
Moreover, unfavorable foreign exchange rate swings can potentially weigh on the company’s international sales. Also, fluctuations in raw material prices may affect operating results in the second-half 2010. This is reflected in our long-term Neutral recommendation for the stock, which is supported by a short-term Zacks #3 Rank (Hold).
About Earnings Estimate Scorecard: Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education.