Balanced View on Calgon Carbon

We are retaining our Neutral recommendation on Calgon Carbon Corporation (CCC - Analyst Report) following its mixed second-quarter 2012 results. Earnings narrowly missed the Zacks Consensus Estimate while sales beat the forecast. Profit dipped 3.5% year over year on account of higher costs.

Improved demand for activated carbon products and services aided to the top line growth (up nearly 10%). The company saw growth across the board in the quarter with its equipment business leading the way.

Calgon Carbon continues to believe ballast water treatment, reactivation services, disinfection by-products, and mercury removal as its basis for sustainable growth. The company remains actively focused on improving margins across all regions.

Calgon Carbon’s strategic initiatives position it for significant growth in the longer term. The company’s last year’s acquisition of Calgon Carbon Japan KK (“CCJ”) has reinforced its position in the second largest carbon consuming market in the world.

The company’s reactivation facilities have remarkably supported its growth and have established its presence in several markets. The global demand for reactivation services is expected to climb as regulations for water quality strengthen around the world.

Calgon Carbon has also reduced its exposure to rising coal costs by identifying new sources of supply and a variety of coals that are effective in the manufacture of its high quality products. The company has embarked on aggressive cost reduction initiatives to boost margins. Its cost improvement program is expected to fetch annual saving of over $10 million starting 2013.

While healthy sales gains and strategic initiatives adopted by the company are expected to usher in benefits in the longer term, we remain concerned about the economic challenges that the company might face in the remainder of 2012.

Moreover, Calgon Carbon uses bituminous coal as the main raw material in the activated carbon production process. The expiry of coal supply contracts, between 2012 and 2015, may affect its ability to meet customer demand.

The challenge also comes in the form of escalating costs. Calgon Carbon’s gross margin contracted in the second quarter as it had to contend with higher plant maintenance expenses and coal costs.

The company’s new president and chief executive officer, Randall Dearth, has a challenging task of keeping costs under control, a problem the company faced in the first two quarters of 2012. Expenses associated with plant maintenance and expansion projects are expected to dent margins in the third quarter.

Calgon Carbon, which competes with MeadWestvaco Corporation (MWV - Analyst Report) among others, currently retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.