Shares of Calgon Carbon [ticker: CCC] slumped last week after the Robinson environmental services concern posted sharply lower second-quarter profits. Shares hit a 52-week low before finishing the week at $12.32, down 92 cents, or 7 percent.

The slide came after Calgon Carbon reported that second-quarter earnings fell 52 percent despite a 20 percent jump in sales. Net income totaled $2.9 million, or 5 cents per diluted share, vs. earnings of $6.1 million, or 11 cents per diluted share, in 2009's second quarter.

A major factor was an $11.5 million charge stemming from last month's verdict against the company in a breach of contract lawsuit. That trimmed earnings by 13 cents per share, chairman, president and CEO John S. Stanik told analysts on a Tuesday conference call. The company plans to appeal the verdict, delivered by a federal jury in Pittsburgh.

Also weighing on the shares were costs and other issues related to Calgon Carbon increasing its stake in a Japanese joint venture that produces activated and reactivated carbon.

Activated carbon is made from coal. It is used to remove impurities from water, air and industrial processes. It accounted for 87 percent of Calgon Carbon's 2009 sales of $411.9 million. Once the activated carbon does its job at water treatment or industrial plants, it can be recycled, or "reactivated," and used again.

The cost and profit margin problems in Japan surprised some analysts, given that Calgon Carbon had forecast higher profit margins on its first-quarter call.

"I think that that's largely the factor in the stock price currently," R.W. Baird analyst J. Michael Horwitz Jr. told Mr. Stanik during the conference call.

Mr. Stanik said the company had expected greater sales would offset the pressure on profit margins in Japan.

That didn't happen.

"The simple answer is we blew it," Mr. Stanik said. "We should not have said to you in the last quarter that we expected operating margins to increase."

Calgon Carbon is addressing the problems, he added.

The company's prospects depend to a large extent on the regulatory climate -- what environmental control and water quality control measures federal and state environmental regulators will approve, whether they will be challenged in court and how quickly they will be implemented.

For example, U.S. Environmental Protection Agency regulations issued four years ago would have required U.S. coal-fired power plants to purchase 750 million pounds of activated carbon annually to remove mercury from their emissions. But a federal appeals court decision overturned the standards. Several states, including Pennsylvania, approved standards of their own. Allentown-based PPL challenged Pennsylvania's standards in court and won. That decision was upheld by the state Supreme Court in December.

Janney Montgomery Scott analyst Ryan Connors said that while the complications implementing the mercury rule were more extreme than the ones the company faced in other markets, "the mercury opportunity is the thing to focus on with Calgon Carbon."

"All the other things pale in comparison to the magnitude of the mercury opportunity," he said.

Mr. Connors said the EPA was scheduled to issue new mercury rules late next year. But he doesn't expect the rules to trigger significant demand until 2014.

"We feel that's a little bit far out on the horizon to be investable now. So that's why we're neutral on the stock," he said.

Calgon Carbon's second-quarter stumble didn't diminish the stock's appeal to JinMing Liu of Ardour Capital Investments. The New York investment firm maintained its "buy" rating on the stock and set a 12- to 18-month price target of $21.50. That would take the stock to levels last seen in September 2008, just before the credit crisis torpedoed Wall Street and the economy.

Mr. Liu said the problems in Japan were "really a short-term thing." He bases his optimism on expected strong demand from municipal water treatment operations and the mercury market. Mr. Liu also expects Calgon Carbon to benefit from limited competition in the U.S. market from China because industrial growth has for the first time made the Asian giant a net importer, rather than exporter, of activated carbon. Chinese shipments to the U.S. market had depressed pricing in the past.

"I don't believe it's going to be a significant threat to the activated carbon industry in this country any more," he said.

Mr. Connors said import relief might be fleeting given a recent spike in shipments from India. He also believes that there could be pricing pressure if demand falters as competitors add capacity. A Louisiana plant being built by a joint venture will be able to produce 150 million tons of activated carbon annually. It is expected to begin production this year.

One of the venture's partners is ADA-ES [ADES], which will be on the receiving end if the jury verdict against Calgon Carbon is upheld. The Littleton, Colo., company alleged it was due a commission from Calgon Carbon's 2008 sale of activated carbon to an electric utility.

The jury ordered Calgon Carbon to pay $12 million in damages.

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