We have reiterated our Neutral recommendation on Ecolab Inc. .
The St. Paul, Minnesota-based company is a leading provider of cleaning, sanitizing, food safety and infection prevention products and services. The company serves the foodservice, food and beverage processing, healthcare, and hospitality markets both in the U.S. as well as internationally.
Its second quarter 2012 adjusted earnings per share of 72 cents were in line with the Zacks Consensus Estimate. Profit attributable to Ecolab grew 47% year over year to $184.5 million (or 62 cents per share), including the Nalco merger restructuring and integration expenses.
However, revenues of $2,958.7 million were lower than the Zacks Consensus Estimate of $3,023 million. The company’s Global Energy, Healthcare and Latin American franchises contributed to pro forma fixed currency revenue growth of 6% (inclusive of the Nalco operations).
Revenues from the company’s larger U.S. Cleaning & Sanitizing segment climbed 5% year over year to $709 million, driven by its Kay and Healthcare businesses.
We are encouraged by Ecolab’s consistent performance of delivering double-digit earnings growth despite the challenging business environment. The company remains optimistic regarding improvement in end-market demand, its ability to attract new customers and opportunities for greater customer penetration through new product development. The company launched the Apex2 warewashing platform and a few other products in May to build on its industry-leading position.
Ecolab continues to invest in strategic areas such as health care, food, water and energy and global pest elimination to expand its business. Management is currently emphasizing product innovation, sales organization, volume growth, appropriate pricing, and merger synergies along with rationalizing operating costs.The company has also taken up an appropriate pricing strategy to offset higher delivered product costs.
Ecolab believes in growth through acquisitions. The company’s Nalco acquisition in December 2011 marked the combination of Nalco's market leadership in water and energy services with Ecolab's competency in food safety and cleaning. The integration process is moving in the right direction as the company is able to deliver both growth and cost synergies. Ecolab continues to focus on investment in key growth businesses and bolt-on acquisitions to gain market share and boost future profitability.
Moreover, Ecolab’s strong international presence has boosted growth, and we believe it will continue in the coming years buoyed by the emerging markets. Asia-Pacific and Latin America represent key growth areas for the company’s overseas operations. The company recently opened a new manufacturing and distribution center in Taicang, China, which is poised to be the leading driver of Ecolab’s sustained growth in the region.
Apart from its positive impact on the company, Ecolab’s significant international presence also helps widen its customer base. However, difficult macroeconomic problems and fluctuations in currency exchange rates are adversely impacting international sales.
Higher delivered product costs have also adversely impacted the bottom line of the business, but this has been offset by solid sales and pricing growth, synergies, cost efficiency, along with new accounts and offerings. Fluctuations in the cost of raw materials, especially in Europe, also remain a headwind.
Even though the company has completed multiple acquisitions over the past few years, back-to-back acquisitions pose substantial integration risks. Also, higher interest charges, share counts, depreciation and amortization (D&A) cost associated with the Nalco acquisition are expected to offset healthy revenue growth in the future.
In addition, Ecolab operates in highly competitive markets and hence we remain cautious about the aggressive competition from players like Clorox and Church & Dwight . We currently have a Neutral recommendation on the stock, which carries a short-term Zacks #3 Rank (Hold).