Rating Update: Stock Rating D-Negative (2/6/20)-Ecolab Inc. (ECL).

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BUSINESS

Ecolab Inc. provides water, hygiene, and energy technologies and services for customers worldwide. The company operates through Global Industrial, Global Institutional, and Global Energy segments. The Global Industrial segment provides water treatment and process applications, and cleaning and sanitizing solutions primarily to large industrial customers within the manufacturing, food and beverage processing, chemical, mining and primary metals, power generation, pulp and paper, and commercial laundry industries. The Global Institutional segment offers specialized cleaning and sanitizing products to the foodservice, hospitality, lodging, healthcare, government and education, and retail industries. The Global Energy segment provides the process chemicals and water treatment needs of the petroleum and petrochemical industries in upstream and downstream applications.
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INVESTMENT RATING

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ECL’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.

Ecolab has a current Value Trend Rating of D (Negative).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Ecolab has a neutral Power Rating of 43 but a poor Appreciation Score of 22, and the Negative Value Trend Rating results.

Ecolab’s stock is selling significantly above targeted value. The current stock price of $207.11 compares to targeted value 12 months forward of $132.
Ecolab’s low appreciation potential results in an appreciation score of 22 (78% of the universe has greater appreciation potential.)
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Ecolab has a Power Rating of 43. (This neutral Power Rating indicates that Ecolab’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: recent price action has been neutral; and is in a slightly weakened position current. An offsetting factor is earnings estimate behavior for Ecolab has been slightly favorable recently.

INVESTMENT PROFILE

Ecolab’s financial strength is high. Financial strength rating is 86.
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Relative to the S&P 500 Composite, Ecolab Inc. has moderate Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that ECL is lower risk. All factors are relative strengths. Ecolab’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. ECL has high market capitalization.

CURRENT SIGNALS

Ecolab’s current operations are eroding. Return on equity is falling, reflecting: and falling tax keep rate.

Ecolab’s current technical position is very strong. The stock price is in a 43.6 month up move. The stock has appreciated 101.6% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Ecolab Inc. (NYSE: ECL) has recently enjoyed significant positive changes in investment behavior: positive upside/downside volume developed.
Slight negative changes in fundamentals have recently occurred for Ecolab Inc. (NYSE: ECL): the stock’s power rating fell below 50.
The stock is currently rated D.
Ecolab Inc. (NYSE: ECL) stock suffered a major decline of -11.8% on 2/6/20. The shares closed at $252.25. NORMAL trading volume accompanied the decline. The stock has risen 4.7% during the last week and has performed in line with the market over the last nine months.

CASH FLOW

In 2018, Ecolab experienced a very significant reduction in cash of -$97 million (-46%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$3,021 million. Non-operating uses consumed -$53 million (-2% of EBITDA). Cash taxes consumed -$242 million (-8% of EBITDA). Re-investment in the business amounted to -$1,264 million (-42% of EBITDA). On a net basis, debt investors received -$514 million (-17% of EBITDA) while equity investors removed -$1,044 million (-35% of EBITDA).
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Ecolab’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Ecolab Inc. Peer Group as well. (Since 2015 Non-operating Income, %EBITDA has experienced very sharp improvement.) In most years, Ecolab was in the third quartile and second quartile. Currently, Ecolab is slightly above median at -2% of EBITDA (-$53 million).

Ecolab’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Ecolab Inc. Peer Group. (Since 2016 Cash Taxes, %EBITDA has experienced a very sharp recovery.) In most years, Ecolab was in the top quartile and second quartile. Currently, Ecolab is substantially above median at -8% of EBITDA (-$242 million).

Ecolab’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Ecolab Inc. Peer Group. In most years, Ecolab was in the second quartile and lower quartile. Currently, Ecolab is slightly above median at -42% of EBITDA (-$1,264 million).

Ecolab’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Ecolab Inc. Peer Group. In most years, Ecolab was in the lower quartile and top quartile. Currently, Ecolab is lower quartile at -17% of EBITDA (-$514 million).

Ecolab’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Ecolab Inc. Peer Group. In most years, Ecolab was in the second quartile and top quartile. Currently, Ecolab is slightly above median at -35% of EBITDA (-$1,044 million).

Ecolab’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Ecolab Inc. Peer Group. In most years, Ecolab was in the second quartile and lower quartile. Currently, Ecolab is substantially below median at -3% of EBITDA (-$97 million).
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Ecolab’s Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Ecolab Inc. Peer Group. In most years, Ecolab was in the lower quartile. Currently, Ecolab is lower quartile at +1%.

PROFITABILITY

Ecolab’s return on equity has improved slightly since 2009 accelerating sharply after the 2011 level.
This slight improvement was due to little change in pretax operating return and very minor positive trend in non-operating factors.
The productivity of Ecolab’s assets declined over the full period 2009-2019: asset turnover has suffered an downtrend even as it experienced a very sharp recovery after the 2011 low.
Partially offsetting this trend, however, pretax margin enjoyed a strong overall uptrend that accelerated from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a very small positive influence on return on equity.
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Ecolab’s return on equity is at the lower quartile (17.8%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is at median (9.2%) reflecting asset turnover that is at median (0.71X) and slightly below median pretax margin (12.9%).
Tax “keep” rate (income tax management) is below median (79.4%) resulting in after tax return on assets that is at median.
Financial leverage (leverage) is at the lower quartile (2.43X).

GROWTH RATES

Overall, Ecolab’s growth rate has slowed very considerably in recent years.
Ecolab’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 8.2% per year. (More recently it has been 2.3%.)

Total asset growth has been 10.8% per year. (More recently it has been 1.9%.)

Annual E.P.S. growth has been 12.8% per year.

Equity growth has been 11.4% per year. (More recently it has been 3.5%.)

Ecolab’s consensus growth rate forecast (average of Wall Street analysts) is 12.3% — in line with the average of the historical growth measures.
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Relative to the Ecolab Inc. Peer Group, Ecolab’s historical growth measures are erratic. E.P.S. growth (12.8%) has been at the upper quartile. Equity growth (11.4%) has been at the upper quartile. Revenue growth (8.2%) has been above median. Total asset growth (10.8%) has been above median.

Consensus growth forecast (12.3%) is upper quartile.
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PRICE HISTORY

Over the full time period, Ecolab’s stock price performance has been highly stable and quite good. Between April, 2009 and February, 2020, Ecolab’s stock price rose +437%; relative to the market, this was a +40% gain.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 25.2% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through January, 2020 of 25.2% is at median relative to Ecolab Inc. Peer Group.

Current 5-year total return performance of 14.9% is above median relative to the S&P 500 Composite.
Through January, 2020, with above median current 5-year total return of 14.9% relative to S&P 500 Composite, Ecolab’s total return performance is substantially below median relative to Ecolab Inc. Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, ECL’s overall valuation is quite high. The highest factor, the ratio of enterprise value/assets, is upper quartile. Price/equity ratio is at the upper quartile. Price/earnings ratio is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. The lowest factor, the ratio of enterprise value/revenue, is above median.

Relative to Ecolab Inc. Peer Group, ECL’s overall valuation is quite high. The highest factor, the ratio of enterprise value/revenue, is at the upper quartile. Ratio of enterprise value/assets is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Price/earnings ratio is upper quartile. The lowest factor, the price/equity ratio, is at the upper quartile.
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Ecolab has a very large value gap compared to the median. For ECL to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 4.51X to 3.25X. If ECL’s ratio of enterprise value/revenue were to fall to 3.25X, its stock price would be lower by $-65 to $142.
For ECL to achieve upper quartile valuation relative to the Ecolab Inc. Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 4.51X to 4.55X. If ECL’s ratio of enterprise value/revenue were to rise to 4.55X, its stock price would increase by $2 from the current level of $207.

VALUE TARGETS

ECL’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
Ecolab’s current Price Target of $130 represents a -37% change from the current price of $207.11.
Ecolab’s low appreciation potential results in an appreciation score of 22 (78% of the universe has greater appreciation potential.)
With this low Appreciation Score of 22, the neutral Power Rating of 43 results in an Value Trend Rating of D.
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Ecolab’s current Price Target is $130 (+61% from the 2018 Target of $81 but -37% from the 02/06/20 price of $207.11). This dramatic rise in the Target is the result of a +9% increase in the equity base and a +47% increase in the price/equity multiple. Each of the Value Drivers contributed to this increase in the price/equity multiple. The forecasted increase in growth has a very large positive impact on the multiple. The forecasted increase in return on equity also has a large positive impact and the decline in cost of equity did as well.
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PTR’s return on equity forecast is 21.7% — slightly above our recent forecasts. Forecasted return on equity exhibited a slight, erratic increase between 2010 and 2018. The current forecast is well above the 2011 low of 14%.

PTR’s growth forecast is 8.0% — above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2013 peak of 17%.

PTR’s cost of equity forecast is 9.5% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic decline between 2010 and 2018. The current forecast is steady at the 2010 peak of 9.7%.
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At Ecolab’s current price of $207.11, investors are placing a positive value of $118 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 4.0% per year, and a return on equity of 19.5% versus a cost of equity of 9.6%.
PTR’s 2020 Price Target of $130 is based on these forecasts and reflects an estimated value of existing assets of $91 and a value of future investments of $39.

About John Lafferty 61383 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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