Highly-Valued Ecolab Hit By Inflation
Shares of Ecolab NYSE: ECL look like they are on a bottom but we aren’t so sure this bottom is going to last. We had our reservations even before the company released Q4 earnings and it had nothing to do with the results or the report. The stock is trading at a whopping 39X its earnings with only tepid growth and a weak 1.11% dividend to sustain it. There is absolutely nothing wrong with Ecolab as a company or its position within the economy other than inflation but trading at such a high valuation while paying such a small dividend is a recipe for price contraction in this market.
Ecolab Falters After Strong Results
Ecolab had a good quarter but there are signs of rising costs everywhere within the report. The company brought in $3.36 billion in revenue for a gain of 9.4% but operating income fell by 10%. The revenue was only as-expected, as well, which we find concerning given the underlying strength in restaurant recovery but Omicron may have played a part in that. On a segment basis, Industrial grew by 8% while Institutional grew 19% but both were offset by a 6% decline in Life Sciences.
Moving on to the margin, the company reports margin compression in 2 of its 3 categories with the company-wide cost of delivered goods up almost double from last year. The good news is that efficiencies and price increases are offsetting the cost increases for now but the darkest days are still to come. As for earnings, the GAAP $1.04 is flat versus last year despite the near 10% gain in revenue while the adjusted $1.28 is up a nickel from last year and beat by a penny.
The guidance is where things get sticky. The company reiterated its full-year guidance for strong revenue growth and low-double-digit earnings growth but the current quarter and 2nd quarter are going to be tough. No specifics were given but the company says costs are running above the Q4 2021 and may remain high through Q2. The good news is that costs should come down and margins widen in the 2nd half but that is still a good 2+ quarters away from being news the market can use.
“While we expect a decent global economy, we also expect the COVID impacts to remain significant during the first half of the year, and we expect inflation to remain high before it progressively eases during the second half of the year. We expect these cost impacts to remain especially strong in the first quarter of 2022, even slightly higher than those experienced in the fourth quarter. We look for the first quarter to show healthy sales growth and a flattish year-over-year earnings per share comparison impacted by continued high raw material and freight costs,” said CEO Christophe Beck.
The Technical Outlook: Ecolab Is A Dead-Cat Bounce
Ecolab began selling off hard early in 2022 when it cut its guidance for earnings and it doesn’t look like the selling is over. Price action hit a bottom at $181 and bounced but the bounce was weak and now, with the Q1 outlook so bleak, it looks like a Dead Cat Bounce. This stock may bob along at the $181 level now but we think it won’t. We think price action will break through support and fall back to the $160 or even $140 levels before finding the true bottom.
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