Morningstar | As Fresh Water Costs Double; Wide-Moat Ecolab Will Grow Profits From Rising Water Treatment Demand
Fresh water consumption continues to exceed readily available supply. Our outlook for rising fresh water costs portends smaller profits for a wide variety of manufacturing companies that consume high volumes of water. However, these companies can mitigate margin contraction with the use of water management systems. Ecolab is a market leader in water management and is well positioned to take advantage of the growing need for water treatment. Our research indicates that the value proposition of Ecolab's water treatment solutions will improve significantly in the coming years.Ecolab's water business might be considered noncore by some, as the company is better known for its cleaning and sanitation solutions. However, we expect the water treatment business to generate 40% of the company's incremental profits over the next decade. We think the magnitude of this contribution is somewhat underappreciated by the market, even as market-implied expectations for the legacy operations remain lofty. Trading at 17.7 times forward EBITDA, the company's multiple seems benefiting of the wide moat rating we assign.
Ecolab's moat is built on customer switching costs underpinned by a razor-and-blade business model and the company's ability to cross-sell products. We assign a $180 per share fair value estimate and wide moat rating to Ecolab.
As a separate consideration, the dearth of readily available fresh water represents a growing concern on the environmental, social, and governance front. This dynamic is likely to attract growing interest from environmentally responsible investors as ESG principles gain mindshare.
For more information on our outlook for fresh water costs and Ecolab, please see our April 5 report, "Make a Splash With Ecolab as Fresh Water Costs Double by 2030."
Ecolab is a provider of water, hygiene and energy technologies and services. The company's segments include: Global Industrial, which provides water treatment and process applications, and cleaning and sanitizing solutions in the manufacturing, food and beverage processing, chemical, power generation, pharmaceutical and commercial laundry industries; Global Institutional, which provides cleaning and sanitizing products to the foodservice, hospitality, lodging, healthcare, government, education and retail industries; and Global Energy, which serves the process chemicals and water treatment needs of the global petroleum and petrochemical industries in both upstream and downstream applications.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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