Calgon Carbon Kept at Neutral

We are reaffirming our Neutral recommendation on Calgon Carbon Corporation ( CCC - Analyst Report ) . The company had a tepid third-quarter 2012 with both revenues and adjusted earnings missing the Zacks Consensus Estimates. It turned to a loss on a reported basis, hurt by a restructuring charge associated with its cost-reduction program.

Revenues fell nearly 6% in the quarter as a healthy double-digit growth in equipment sales were more than offset by a decline in the core Activated Carbon and Service segment. The company saw lower demand for activated carbon in the quarter.

Calgon Carbon remains confident in its ability to balance the need for future investment with its responsibility to provide short-term returns. The company continues to believe ballast water treatment, reactivation services and mercury removal as its basis for sustainable growth. It 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 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, which includes consolidation of operations and headcount reductions, is expected to contribute toward margin expansion in the fourth quarter.

While healthy sales gains and strategic initiatives will be beneficial in the longer term, we are concerned about the economic challenges that the company might face in the fourth quarter.

Calgon Carbon’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 three quarters of 2012. The company’s gross margin contracted in the third quarter as it had to contend with higher maintenance expenses in its Pearl River plant in Mississippi.

Moreover, unfavorable currency exchange movements may continue to weigh on the company’s revenues. In addition, costs associated with the cost reduction initiative as well as the early retirement program are expected to be a drag on the company’s earnings in the fourth quarter.

Calgon Carbon, which competes with MeadWestvaco Corporation ( MWV - Analyst Report ) among others, currently retains a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating.