Ecolab’s (ECL) fourth-quarter fiscal 2010 results, announced on February 17, were met with bearish reactions from the analysts as reflected by a host of downward revisions. The Minnesota-based leading cleaning and sanitation products maker posted adjusted earnings of 60 cents for the quarter which missed the Zacks Consensus Estimate by a penny, representing a negative surprise of 1.64%.
Fourth Quarter Revisited
Net income for the quarter leaped 13% year over year to $131.3 million owing to higher sales from the company’s overseas business and lower tax. Revenues rose marginally to $1,575.5 million, missing the Zacks Consensus Estimate.
The results were once again supported by strong performances across emerging markets accompanied by growth in global lodging and food and beverage businesses. Ecolab’s effective cost-management and operational efficiency contributed to operating margin expansion in the quarter. Separately, Ecolab announced a major restructuring plan for its European business during the earnings call.
We have discussed the quarterly results at length here: Ecolab Misses Barely, Will Cut Jobs
Agreement – Estimate Revisions
Estimates for Ecolab are clearly inclined towards the negative side following the fourth quarter results, manifesting a sheer directional consensus. Out of 13 analysts, 8 have chopped their forecasts for fiscal 2011 over the past week accompanied by a sole reverse movement. Likewise, 6 (out of 12 analysts) have trimmed their estimates for the first quarter over the similar period with none moving in the opposite direction. A similar trend applies to the estimates over the past month.
The pessimism appears to reflect the raw material pricing pressure and the potential dilutive impact of the hefty expenses (associated with the recently announced restructuring in Europe) on the company’s bottom line.
Magnitude – Consensus Estimate Trend
Given the significant downward pressure from the negative revisions, estimates for the first quarter and fiscal 2011 have gone down by 4 cents and 3 cents, respectively, over the last 7 days. The current Zacks Consensus Estimate for fiscal 2011 is $2.50, representing an estimated annualized growth of 12.04%.
Ecolab in “Neutral” Zone
Ecolab leads in cleaning, sanitizing, pest elimination and food safety solutions with revenues of $6 billion. The company continues to invest 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 as manifested by its back-to-back acquisitions in 2010. Moreover, the company remains committed to delivering incremental returns to investors leveraging a solid balance sheet, healthy cash flow and earnings stability.
In a major move, Ecolab has announced a restructuring plan for its European business aimed at boosting efficiency and profitability in that operation. As part of this initiative, the company plans to realign its supply chain and prune headcount which will eliminate roughly 900 jobs.
The restructuring, once completed, has been projected to fetch annual cost savings of more than $120 million, of which, roughly $4 million to $6 million are expected in 2011. The company expects savings from the restructuring to benefit its second-half 2011 results, including opportunities for meaningful margin expansion.
Moving forward, Ecolab should benefit from the 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 exposure, we remain cognizant of intense competition and pricing pressure.
The company’s U.S. Cleaning & Sanitizing and International divisions face stiff competition from Clorox (CLX) and Church & Dwight (CHD). Moreover, raw material price fluctuations represent a headwind for Ecolab in first-half 2011. Also, the company’s aggressive acquisition strategy has inherent integration risks.
While Ecolab will eventually benefit from the meaningful savings to be realized from its recently announced restructuring in Europe, associated hefty expenses may be a drag on its bottom line in the forthcoming quarters. This is reflected in our current Neutral recommendation on the stock, backed by a short-term Zacks #3 Rank (Hold).