We are retaining our Neutral recommendation on
Calgon Carbon Corporation
) 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
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
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.
CALGON CARBON (CCC): Free Stock Analysis Report
MEADWESTVACO CP (MWV): Free Stock Analysis
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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
) among others, currently retains a Zacks #3 Rank, which translates
into a short-term (1 to 3 months) Hold rating.