Earnings Preview: Ecolab (ECL)

Leading cleaning and sanitation products company Ecolab Inc. (ECL) is slated to release its second-quarter fiscal 2010 results on Tuesday, July 27, 2010. In its first-quarter conference call, the company stated that it envisions sustained top-line improvement (in constant currency) in the second-quarter with currency exchange translation favorably impacting revenues and earnings.

Moreover, margins are projected to improve on the back of significant cost-saving measures. Ecolab expects adjusted earnings in the range of 54 cents to 57 cents. The current Zacks Consensus Estimate for the second-quarter is 56 cents, representing 14.16% annualized growth.

First-Quarter Flashback

Ecolab reported first quarter earnings per share of 41 cents, topping the Zacks Consensus Estimate of 39 cents per share and the year-ago earnings of 33 cents. The results also beat the company’s forecasted range of 36 cents to 40 cents per share. Net income climbed 66% year-over-year to $95.5 million.

Revenues rose 5.9% year-over-year to $1.43 billion, ahead of the Zacks Consensus Estimate of $1.42 billion, with Ecolab’s US Cleaning & Sanitizing operation sales growing 2% year-over-year to $632 million. International sales, measured at fixed currency rates, inched up 2% year-over-year to $700 million.

The better-than-expected results were driven by strong performances in Asia-Pacific, Canada and Latin America and healthy contributions of the company’s Kay business, which provides expertise regarding food safety to quick service restaurants. Results were also helped by improved volume, favorable pricing, lower delivered product costs and cost-cutting initiatives.

Estimate Revisions Trend

Agreement of Analysts

Quarterly estimates for Ecolab have barely moved over the past week and month. Out of 16 analysts covering the stock, none have made any estimate revisions in either direction. A similar trend applies to fiscal 2010. The lack of estimate revisions, in part, has been fueled by currency exchange headwinds and modest pricing pressure, which offset improving demand patterns across key service markets.

Magnitude of Estimate Revisions

The magnitude of revisions for the forthcoming quarter has plateaued over the last 7, 30 and 60 days, a reflection of the lack of estimate revisions. This implies that the analysts are expecting the company to report in line. Estimates for 2010 have remained static over the last week and month while they have gone down by a penny over the past 60 days. The current Zacks Consensus Estimate for 2010 is $2.24, reflecting a year-over-year growth of 12.68%.

With respect to earnings surprise, Ecolab has posted three positive surprises in the preceding four quarters, while it has trailed the Zacks Consensus Estimate on one occasion.

Our Take on Ecolab

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

To boost growth, Ecolab continues to invest in strategic areas such as product innovation, sales organization, healthcare, water and energy and global pest elimination while rationalizing operating costs. The company remains focused on bringing new technologies aimed at reducing food safety risks. Moreover, Ecolab is committed to 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 by 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 input costs may affect Ecolab. This is reflected in our Neutral recommendation for the stock, which is supported by a Zacks #3 Rank (Hold).

Ecolab Inc. (ECL): Free Stock Analysis Report
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