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Ecolab Stays at Neutral

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On Apr 5, we retained Ecolab Inc. (ECL - Free Report) at Neutral, following its fourth-quarter results. Earnings of this leading manufacturer of cleaning and sanitation products company were in line with the estimates and profits surged year over year. However, depressed gross margin and acquisition-related risks remain concerns.

Why the Retention?

On Feb 26, Ecolab posted adjusted earnings per share of 89 cents for the fourth quarter of 2012, which was in line with the Zacks Consensus Estimate. This result represented a 27% jump from the year-ago earnings of 70 cents per share.

Revenues soared 65% (including the Nalco merger) year over year to $3,045.8 million for the fourth quarter. On a fixed currency pro forma basis, revenues grew 7% to $3,045.8 million (inclusive of the Nalco operations). Revenues were higher than the Zacks Consensus Estimate of $3,033 million. Growth was triggered by higher sales from Global Energy, Latin America and worldwide Kay franchises.

The company’s earnings managed to beat the Zacks Consensus Estimates in 1 out of the last 4 quarters with an average surprise of 4.17%. However, it managed to meet the estimates in the rest of the quarters. Following the earnings release, the Zacks Consensus Estimate for 2013 remained unchanged at $3.55 per share but increased by 1.2% to $4.18 per share for 2014 in the last 60 days.

Ecolab serves the food service, food and beverage processing, healthcare, energy, water treatment and hospitality markets both in the U.S. as well as internationally. We believe that management’s focus on acquisitions, new product launches, sales and service force improvement, new account wins along with better customer penetration capabilities will drive growth in 2013 and beyond. Moreover, in an effort to leverage margin expansion, the company continues to undertake cost-saving measures, enhance operating performance and achieve merger synergies from its acquired entities.

Although delayed twice, we believe that the successful completion of the pending Champions deal should boost Ecolab’s energy business. However, we remain on the sidelines until the deal closes, which is expected on Apr 15. Additionally, difficult economic trends, currency fluctuations along with higher raw material prices and delivered product costs also remain headwinds for Ecolab.

Other Stocks to Consider

Ecolab currently has a Zacks Rank #3 (Hold). Other companies from the basic materials sector such as Balchem Corp. , International Paper Company (IP - Free Report) and Prospect Global Resources, Inc. warrant a look. While Balchem and International Paper are Zacks Rank #1 (Strong Buy) stocks, Prospect carries a Zacks Rank #2 (Buy).

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