NLC Nalco Holding Company Common Stock

We reaffirm our Neutral recommendation for leading cleaning and sanitation products company Ecolab Inc (ECL). The company’s second-quarter fiscal 2011 earnings per share of 64 cents met the Zacks Consensus Estimate while profit fell as charges associated with the European restructuring more than offset the double-digit growth in the top line.

Sales jumped roughly 12% year over year, boosted by healthy contributions from the company’s U.S. Cleaning & Sanitizing business as well as Asia-Pacific and Latin American operations, supported by acquisitions and favorable currency exchange translation. The Minnesota-based company raised its earnings forecast for fiscal 2011.

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 enhance margins.

We believe Ecolab’s strong international presence will continue to boost sales in the upcoming reporting periods, buoyed by emerging markets. Asia-Pacific and Latin America represent the key growth engine for the company’s overseas operation. Moreover, an uptick in hotel lodging demand and favorable market trends across food and beverage and healthcare segments represent tailwinds.

Ecolab is also active on the acquisition front and continues to explore opportunities to expand into emerging markets for growth. The company’s move to buy Nalco Holding (NLC) represents a major step, enabling it to bolster its water management business.

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. Moreover, Ecolab remains committed to deliver incremental returns to investors leveraging a solid balance sheet and healthy cash flows.

While Ecolab’s strong international exposure (especially in emerging markets) and recovery across its end-markets is encouraging, aggressive competition remains a concern. The company’s U.S. Cleaning & Sanitizing and International divisions face stiff competition from Clorox (CLX) and Church & Dwight (CHD).

Although Ecolab is employing effective pricing strategies to offset the raw material inflation, raw material costs are expected to remain a headwind in the third quarter. We also remain aware of the potential dilutive impact of the hefty restructuring expenses on the company’s bottom line.

 
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