Ecolab: Slow And Steady Wins The Race

Key Points

• Ecolab produced a better-than-expected quarter and reaffirmed its long-term targets. 
• The yield isn't high, but it's reliable and compounded by share repurchases. 
• Analysts are capping gains now but may lift their targets now that results are in. 

Ecolab NYSE: ECL has had its share of issues over the last 2 years, but those are centered on share prices which have retreated to reasonable levels. The stock soared after COVID-19, driven by the expectation sanitation services and products would be in high demand, but that demand never materialized to the extent that share prices were supported. The point is that Ecolab has been growing since the bottom of 2020 and is approaching its pre-pandemic business levels.

Between then and now, it has paid a steady and reliable dividend, increasing the payment every year, delivering returns for investors willing to ride out the storm. That’s a testament to the company’s management which has it on track to reach Dividend King status. 

Ecolab isn’t a high-yielding stock, but its 1.25% yield is as reliable as Wall Street can offer. The company pays out less than 50% of its earnings and targets double-digit annualized EPS growth over the long term. That has it set up to continue hiking the distribution at a high-single to low-double-digit pace, which will help to support the market over the long term.

The company uses debt to finance its growth, but the load is well-managed. The company’s leverage ratio is less than 1.5X equity, leaving room for share repurchases in the cash flow. The share count in Q1 2023 is down 1% YOY and can be expected to fall over the year. 

Ecolab Has Solid Quarter, Reaffirms Guidance 

Ecolab had a solid quarter, producing growth, outpacing the consensus and delivering positive guidance. The company reported $3.6 billion in net revenue for a gain of 10.1%, beating the Marketbeat.com consensus on strength in all segments. The company pointed out the double-digit gains in Industrial and Institutional/Specialty revenue, which grew y 12% and 14%, respectively, but the 9% gain in Health & Life Sciences is also solid. On an organic basis, discounting FX headwinds, the company grew by 13%.

The margin was also solid. The GAAP margin widened considerably due to 1-offs but even the adjusted margin expanded by low-double-digit basis points. The salient point is that GAAP and adjusted operating income and earnings are both higher compared to last year, outpaced the consensus and led to solid guidance.

The company expects earnings growth to accelerate to the upper end of its long-term target range of low-double-digits by the end of the year and for Q2 adjusted EPS of $1.15 to $1.25. That brackets the consensus figure nicely, which may not provide a catalyst for a rally but should help support the stock price action. 

Analysts Cap Gains, Institutions Buy 

The analysts are Holding Ecolab but may cap gains in the near term. The sentiment has edged lower from Moderate Buy last year, and the price target has fallen with it—the Marketbeat.com consensus price target assumes the stock is fairly valued at the current levels, which suggests it may be range bound at these levels until there is a change in sentiment.

That could come now that the Q1 results are in; until then, the institutions are buying Ecolab at these levels and have increased their holding to 87% of the company. 

The price action is iffy. The stock hit bottom and may be forming a reversal, but it is still struggling with resistance. Resistance is near the $175 level, marking the baseline of a Head & Shoulders bottom. If the market can get above that level, it may continue higher; otherwise, this stock will likely remain range bound at current levels until later in the year.