Ecolab Gives Mixed Signals Ahead Of February Release

| About: Ecolab Inc. (ECL)

Summary

Dividend aristocrat faces uncertain future.

Despite expansion into new regions, sales in key energy segment threaten to dampen overall performance.

Stock is overvalued against its peers.

Investment Thesis

In Q3, Ecolab Inc. (NYSE: ECL) saw increased sales from new product lines and growth in the Industrial, Institutional and Other Segments driven by continuous innovation and forward-looking investments. The Q4 earnings are due for release on 21 st February. What will the outcome mean for investors?

The last quarter saw the multinational grapple with a decline in Energy sales, which were offset by lower production costs, more innovation and entry into new business segments. Its presence in more than 170 countries means that it has to brave currency headwinds, unpredictable end markets and weak economies. However, a wide assortment of products and services backed by heavy investment have kept the company afloat and on a growth trajectory-the adjusted EPS for Q3 grew 7%.

Founded in 1923, Ecolab has grown through transformative acquisitions meant to expand its portfolio of products and services. The most notable purchases include Champion Technologies, Swisher Hygiene and Nalco Holding Company. Since going public in 1957, Ecolab is surely on the radar of shareholders and potential investors given its presence in 7 geographical regions.

Current Performance

By segment, the Industrial sales were strong in the North American region, though Q3 was a decline compared to the previous quarters. The growth in the light and heavy industry was offset by decline in the water and mining business. Ecolab is on a roll to expand its water business. In January 2017, it acquired Abednego Environmental Services-a supplier of water, energy and waste management services to the automotive industry. This acquisition will expand the water business operations and marks an additional $40 million in revenues to the Nalcos business.

The Healthcare business grew by 6%. In February 2017, Ecolab expanded its European operations by acquiring Laboratoires Anios in France- a manufacturer of hygiene and disinfectant products. Despite economic slowdown in 2016, Ecolab expects to stabilize 2017 and deliver higher topline growth.

Conclusion

An analysis of Ecolab gives me mixed feelings. On one side, I feel Ecolab has taken measures to sustain its growth and expansion by going into new markets. It has also consistently paid dividends for more than 25 years, making it a valuable possession for holders. On the other hand, Ecolab seems slightly overvalued, giving it little room for growth and huge fluctuations. It also faces an uphill task in delivering stable sales in its lagging energy segment-operating income in energy fell 20%. In my analysis, I will use a table comparing Ecolab with PPG Industries, Inc. (NYSE:PPG), Stepan Co. (NYSE: SCL) and The Sherwin-Williams Company (NYSE: SHW).

Metric

ECL

PPG

SCL

SHW

Dividend Yield (Forward)

1.23%

1.60%

1.08%

1.10%

Est. Forward PE Ratio

24.61

16.06

17.19

22.21

EBITDA (NYSE:TTM)

2.333B

1.852B

203.83M

1.898B

Rev Per Share

11.45

14.23

19.28

29.43

Profit Margin

11.05%

-4.86%

4.59%

7.30%

PE ratio

33.50

32.00

19.71

25.99

From the table, Ecolab shows a relatively strong dividend yield. My view is that a long earnings history is a good indicator of a company on a growth trajectory and one that is consistent in giving value to shareholders. Future earnings are dependent on the profitability of a company, and Ecolab seems to be at a comfortable distance ahead. It has also made cost-reduction measures across all segments to maximize output at minimum cost. However, Ecolab seems to be quite pricey compared to its peers. Its revenue per share does not justify this price- either metric has to give way.

Another argument on Ecolab would be the rise and fall of prices of oil and natural gas. Its energy sector is highly dependent on global consumption of oil- about 35 million barrels are produced using Ecolab's technology. Interventions by OPEC have been initiated in a bid to slash oil production to boost demand and prices. Between 2016 and 2017, prices have doubled from $26 to $53.50. High economic growth is expected to grow oil demand to 98.5 million barrels a day in 2017. I have no doubt that Ecolab's clients will revive their demand for oil, sending the positive ripple effect up to Ecolab's coffers.

When I weigh Ecolab, and given its expected announcement, it is unclear what step to take on this stock. It could go both ways, and we don't want to gamble with our hard-earned money. For now, I think a hold on this stock would be advisable, waiting for the release to give us a red or green light.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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