Ecolab Q1 Earnings Rise, In Line with Estimates - Analyst Blog

Ecolab Inc. ECL posted a 23.3% rise in adjusted earnings per share (excluding special gains and charges) to 74 cents for the first quarter of 2014 from 60 cents in the same quarter of 2013. However, earnings were flat compared with the Zacks Consensus Estimate.

The rise in adjusted earnings was attributable to strong sales growth and operating margin gains owing to cost efficiency programs and synergies. Adjusted net earnings rose 26.4% to $228.2 million from $180.5 million in the first quarter of 2013.

Revenues and Margins

Revenues grew 16.2% year over year to $3,336.6 million. Adjusted fixed currency revenues increased 18.2% to $3,309.1 million. Revenues were slightly above the Zacks Consensus Estimate of $3,320 million.

Adjusted operating earnings rose 23.3% to $386.5 million while adjusted operating margin went up 70 basis points (bps) to 11.6% from 10.9% in the 2013-first quarter. In fixed currency, operating earnings escalated 26.7% to $383.6 million in the quarter.  

Segment Results

At constant exchange rate (CER), revenues from Global Industrial segment grew 3.1% to $1,138 million, driven by Food & Beverage and Water. Operating earnings in fixed currency increased 7.0% to $119.5 million compared with the year ago period. Regionally, Asia Pacific and Latin America performed well, with mediocre gains in North America and a modest decline in EMEA.

AT CER, revenues from the Global Institutional segment increased 3.1% to $993.3 million, led by strong sales growth in Specialty business. In fixed currency, operating earnings increased 6.6% to $155.5 million. Sales were strong in Latin America, with good gains in North America and Asia Pacific, and a modest rise in EMEA.

AT CER, the Global Energy segment posted solid revenue growth of 77.7% to $1,005.1 million in the first quarter 2014, mainly driven by the Champion acquisition. Operating earnings at fixed currency increased 82.7% to $131.7 million. Acquisition adjusted fixed currency revenues grew 8% reflecting strong growth in the upstream and downstream markets, while acquisition adjusted fixed currency operating earnings rose 36% in the quarter.

At CER, revenues from the Other segment inched up 4.1% to $172.7 million in the first quarter. Fixed currency operating income increased 1.8% to $22.1 million.

Balance Sheet

ECL exited the year with cash and cash equivalents of $300.3 million, significantly down by 63.6% from $824.3 million as of Mar 31, 2013. Total debt increased 15.6% to $7,204.0 million from $6,234.2 million as of Mar 31, 2013.

Guidance

For the second quarter of 2014, ECL expects adjusted gross margin of 46% and adjusted earnings per share of $1.00 to $1.04. The Zacks Consensus Estimate of $1.03 lies within the guided range.

For full year 2014, ECL anticipates adjusted gross margin of 47% and reiterated its higher adjusted earnings per share between $4.10 and $4.20 compared with 2013. The Zacks Consensus Estimate of $4.18 for the year lies within the guided range.

Our Take

We are impressed with Ecolab's first quarter results. We take note of the solid earnings growth in the reported quarter along with the growth-oriented outlook for the year.

However, we remain cautious about aggressive competition. Challenging economic and market trends along with unfavorable internal issues will likely be near-term headwinds for the company.

ECL currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Globe Specialty Metals, Inc. GSM, International Flavors & Fragrances Inc. IFF, and Sensient Technologies Corp. SXT. All of them carry a Zacks Rank #2 (Buy).