NLC Nalco Holding Company Common Stock

Leading cleaning and sanitation products maker Ecolab Inc (ECL) is slated to release its third-quarter fiscal 2011 results before the opening bell on Tuesday, October 25. The Minnesota-based company expects adjusted earnings between 73 cents and 75 cents a share for the September quarter.

The forecast for the third quarter assumes a dilution of roughly 5-6 cents a share, primarily associated with the company’s restructuring activities but excludes the potential impact of its previously-announced buyout of water treatment company Nalco Holding (NLC). The current Zacks Consensus Estimates for revenues and earnings for the third quarter are $1,738 million and 75 cents, respectively.

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

Second Quarter Review

Ecolab’s second quarter earnings per share of 64 cents met the Zacks Consensus Estimate while profit fell as charges associated with the company’s European restructuring program overshadowed the double-digit growth in sales.

Profit (attributable to Ecolab) for the quarter dipped 2.6% year over year to $125.9 million hit by hefty charges associated with the European restructuring. Revenues soared 11.7% to $1,698.8 million, beating the Zacks Consensus Estimate of $1,654 million.

Revenues were boosted by healthy sales across the company’s U.S. Cleaning & Sanitizing business as well as the Asia-Pacific and Latin American operations, supported by acquisitions and favorable currency exchange translation effect. Ecolab raised its earnings forecast for fiscal 2011.

Estimate Revisions Trend

Agreement

Estimates for the third quarter demonstrate an absolute lack of movement over the past week and month. Out of 13 analysts covering the stock, none have made any revisions in either direction over these timelines. An identical trend applies to the estimates for fiscal 2011.

Magnitude

Given the lack of revision, estimates for the third quarter and fiscal 2011 have been torpid over the last 7 and 30 days. The current Zacks Consensus Estimate for 2011 is $2.55, representing an estimated year -over-year growth of 14.17%.   

Our View

Ecolab’s strong international presence has boosted growth and we believe will continue doing so in the September quarter, buoyed by emerging markets. Asia-Pacific and Latin America represent the key growth engine for the company’s overseas operations. Moreover, the uptick in hotel lodging demand and favorable market trends across the food and beverage and healthcare segments should support results.

Ecolab remains active on the acquisition front and continues to explore opportunities to expand into emerging markets. The company’s move to buy Nalco Holding represents a strategic fit, enabling it to bolster its water management business. Synergies from acquisitions should contribute to the company’s bottom line in 2011.

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, aggressive competition concerns us. 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 are also wary of the potential dilutive impact of the hefty restructuring expenses on the company’s bottom line. We currently have a long-term Neutral recommendation on Ecolab. The stock currently retains a Zacks #2 Rank, which translates into a short-term “Buy” recommendation.

 
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