In this article, let's take a look at Ecolab Inc. (ECL, Financial), a $33.12 billion market cap company that is a leading worldwide marketer of water, hygiene and energy technologies and services for foodservice, food processing, hospitality, health care, industrial and oil and gas markets.
Strategic acquisitions
The recent acquisitions are going well for the company. In 2011, it acquired Nalco Holding Co., a leading industrial water services provider and in April 2013, it was the turn of privately held Champion Technologies. The acquisitions of both companies have changed something in its composition because it was added water and energy-focused businesses. It is true that it incorporated more cyclicality with the addition of the energy segment.
Industry characteristics
The industry is fragmented; competition is from regional as well as local companies. Ecolab controls about 10% of the roughly $60 billion global market. Further, it almost doubled revenue of its largest competitor, Diversey.
Building loyalty
With the implementation of the Circle the Customer-Circle the Globe strategy, it has expanded its customer base and its products and services worldwide. A razor-and-blade model which consists on loaning customers cleaning equipment that can only use Ecolab's proprietary consumables, generates steady revenues.
The sales team sells generally directly to customers and focuses on improving cost efficiencies for its clients in areas such as labor, energy, and water.
Major risks
The principal risk of Ecolab is that customers are affected by changes in travel and dining activities. Also, it has significant foreign currency exposure with about half of sales generated outside the United States. In 2013, sales were 51% in the U.S., 24% in Europe, Middle East and Africa, 12% in AsiaPacific, 8% in Latin America and 5% in Canada.
Revenues, margins and profitability
Looking at profitability,revenue grew by 6.90% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.02 vs $0.69). During the past fiscal year, the company increased its bottom line. It earned $3.15 versus $2.36 in the previous year. This year, Wall Street expects an improvement in earnings ($4.19 versus $3.15).
The gross profit margin is considered high, at 52.58% and the net profit margin of 8.72% is similar to the industry median.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| ECL | Ecolab | 15.50 |
| ASH | Ashland Inc | 12.71 |
| VAL | Valspar Corp | 27.74 |
| CE | Celanese Corp | 51.10 |
| PPG | PPG Industries Inc. | 38.82 |
| Â | Industry Median | 7.00 |
The company has a current ROE of 15.50% which doubles the industry median and is higher than the one exhibit by Ashland (ASH, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Valspar (VAL, Financial), PPG Industries (PPG, Financial) and Celanese (CE, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 31.0x, trading at a premium compared to an average of 23.5x for the industry. To use another metric, its price-to-book ratio of 4.5x indicates a premium versus the industry average of 1.69x while the price-to-sales ratio of 2.4x is above the industry average of 1.02x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $27.070, which represents a22.1% compound annual growth rate (CAGR).
Final comment
A good scale, a solid business model, and a strong salesforce, constitute good competitive advantages. For the next years, we believe the company will continue to benefit from smaller players. It also plans new strategic business acquisitions which could help with its growth.
While Nalco is more exposed to volatile raw material costs, Champion is more dependent on the energy sector. But both add risk for Ecolab.
Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Bill Frels (Trades, Portfolio) and Jim Simons (Trades, Portfolio)added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
