Ecolab Positioned For Strong Earnings Growth
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Imagine having someone come into your home, assess your cleaning needs, sell you the right products and show you how to use them, then having him or her come back and make sure that you were keeping everything up to par. This example may sound extreme, but what if instead of your home, it was your business? What if you owned a restaurant or healthcare facility and any lapse in your maintenance of the facilities could seriously injure someone, not to mention the bad publicity such a scandal would produce? Think of your own experiences dining out and the way a clean restaurant or restroom contributed to your evening, or took away from it. It really is no small matter.
That’s what makes Ecolab (NYSE: ECL) so important. It delivers the products and services industrial clients need to maintain a standard of excellence – and it’s why I rate this company as a top pick. Selling cleaning products is one thing, and there are a lot of companies that do, but Ecolab is also focused on quality assurance.
Aside from industrial cleaning, Ecolab is also involved in water treatment. Now, don’t let the name fool you – I’m not talking about a Brita water filter here. I am talking about purifying water so that it is safe to drink. This is a big business people. The need for water is inevitable between population increases, pollution and environmental shifts. Water is also used in processing and manufacturing. That water also needs to be treated. The company that provides this “Blue Gold” will make out, but so will the companies, like Ecolab, that treat it – and the company’s metrics demonstrate that fact.
Ecolab recently traded at $61.75 on a mean one-year target estimate of $64 a share. In addition to the upside, this company is priced at 16.43 times its forward earnings and pays an 80 cents dividend (1.30% yield). Plus, there is no fear that the dividend will be going anywhere. Ecolab has paid cash dividends for 75 consecutive years and they have climbed consistently for decades. The company also boasts a low payout ratio of 33.0%.
According to Yahoo Finance, analysts estimate that Ecolab’s earnings will increase by 14.53% a year on average over the next five years, with most of that growth coming this year and next. Analysts predict that the company’s earnings will grow by 19.30% this year and 20.80% next year. These estimates over Ecolab’s earnings growth far outpace industry expectations of 1.10% for 2012 and 14.80% for 2013, but industry expectations for the next five years are a touch higher than Ecolab’s, at 15.17%. This suggests that while industry growth is limited this year and next, it will pick up the pace starting in 2014 – this is the exact opposite of the growth pattern predicted for Ecolab.
Ecolab has several major opportunities for growth. It completed a merger with Nalco Holding Company in late November 2011. Some investors are concerned that Ecolab’s acquisition of Nalco will dwindle away the company’s earnings consistency, saying that adding Nalco to the mix will make Ecolab’s earnings more cyclical, but I disagree. Because Ecolab is contributing 63% of pro forma EBITDA to the combined entity, Ecoloab’s consistency should remain firmly intact. Further, Nalco’s products garner a higher demand than Ecolab’s and its operating trends really are not so different anyway. The deal with Nalco is that it was undercapitalized. It couldn’t grow – be it technologically or in capacity – because it lacked the funds. I think that Ecolab will be able to better manage Nalco’s financial affairs.
The company also recently acquired Esoform, which is the largest independent Italian healthcare manufacturer focused on infection prevention and personal care. Ecolab bought the Brazilian InsetCenter pest control business last quarter. The acquired company’s operations will be integrated into Ecolab’s existing Brazilian Pest Elimination business. Each of these purchases will allow provide opportunities for Ecolab to increase its service capacity and exploit economies of scale, and scope. Insiders in the company appear to be bullish on Ecolab’s future. Over the last six months, insiders bought roughly 3.24% of the company’s 210.56 million float.
Ecolab is also positioned much better than its competitors. Rival Church & Dwight Company (NYSE: CHD) does have nearly the outlook Ecolab does. Church & Dwight recently traded for $47.79 a share on a mean one-year target estimate of $48.88. While the company’s upside is limited, it does pay a 96 cents dividend (2.00% yield) on a 28% payout ratio and is priced higher than Ecolab at 17.95 times its future earnings. Church & Dwight also lacks the earnings growth estimates of Ecolab. Its earnings are expected to grow by just 10.53% a year on average over the next five years.
Ecolab is driving growth through well-timed acquisitions that fill in the gaps between what it currently offers and what the purchased company does. Ecolab is also very good at investing in strategic areas, like product innovation, healthcare, water, energy and pest elimination while rationalizing its costs to do so. Last year, Ecolab announced a major restructuring plan or its European operations. The idea is to boost efficiency and, in turn, profitability. Part of this change-up is to recalibrate its supply chain and cut around 900 jobs. No one likes to lay off workers, but the change is expected to save Ecolab over $120 million each year.
Granted, there are factors to consider before investing in a company like Ecolab. It does have strong international exposure but this just opens it up to a whole range of external factors that could affect its stock price. There are also concerns over aggressive competition, fluctuations in raw material prices and the effect that all its recent acquisitions, and the expenses associated with those purchases, will have on the company’s bottom line – but I am hopeful about Ecolab’s outlook.
The Motley Fool owns shares of Ecolab. BobbyFisher has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.