Ecolab Is Still A Good Investment In The Reopening

Ecolab Fails To Impress With Its Q1 Results 

Ecolab (NYSE: ECL) has been one of our top reopening plays since the first of the year and it still is. The company is well-positioned not only as an institutional services company servicing the restaurant, hospitality, and travel industries but also as an industrial services company and as a health & life sciences services company. 

Over the past year, the business has been supported by demand for sanitation and COVID-mitigating services while stay-at-home activity curbs sales on the institutional end. Now, with the reopening already beginning to pick up steam here in the U.S., the industrial and institutional segments are expected to rebound strongly. When they do both revenue and earnings will surge to pre-COVID levels and higher. 

CEO comment: “We look for significant growth in the second quarter, primarily driven by strong year-on-year growth in our Institutional division as new business as well as improving trends in early-reopening U.S. states and continued U.S. vaccination progress more than offset a softer Europe ... We expect robust consolidated gains in the second half, and continue to look for strong year-on-year growth for the full year 2021 with earnings per share above 2019 earnings per share from continuing operations …” 

Ecolab Has Tepid Quarter, Reopening Trends In Focus 

Ecolab didn’t have a terrible quarter but it didn’t have a great one either. The company’s $2.98 billion in revenue is down 19.3% from last year due to the impact of COVID but is at least a little better than expected. The results would have been even better if not for the Texas freeze. The disruption to business that caused is worth about 1.0% of the revenue decline and $0.10 on the bottom line. 

The results were driven by strong gains in the Health & Lifesciences segment that was more than offset by weakness in the Industrial and Institutional segments. H&L revenue grew 14% from last year to top $0.29 billion, while the Industrial segment shrank only 2.0% this quarter on steadily rising demand. 

The Institutional segment saw its revenue decline 21% from last year but it too is seeing sequential improvement relative to prior-year results. The Institutional segment is the 2nd largest by volume, the 21% decline is worth nearly $0.250 billion or enough to bring adjusted revenue back to pre-COVID levels and we think business in this segment will top pre-COVID levels very soon. 

Moving down the report, the margins took a hit over the past year but that too is due to COVID. The impact of COVID on mix and volume deleveraged fixed costs and the company’s cost-saving efforts. While bad in the near term, we see a silver lining in that earnings leverage should return with both volumes and mix as the reopening progresses and at a greater rate than before the pandemic. 

The Technical Outlook: Ecolab Pulls Back Into A Buying Opportunity 

Shares of Ecolab shed nearly 4.0% following the release of the Q1 results and may fall further, at least in the near term. The Q1 results were less than inspiring but are setting the stock up for another run at a new all-time high later in the spring/early summer. Until then, investors should watch for support and bottoming in the range of $218 to $220. If the stock pulls back below $218 it won’t change the long-term outlook but it will make the stock cheaper and more attractive.