Morningstar | Ecolab Reaffirms Guidance; Shares Fairly Valued With No Changes to Our $141 FVE. See Updated Analyst Note from 31 Jul 2018
Wide-moat Ecolab reported decent second-quarter results as operating income grew 3% year on year after adjusting for currency moves and acquisitions. During the quarter, higher volumes, price increases, and cost-saving initiatives offset raw materials inflation headwinds. In its earnings release, management maintained 2018 full-year guidance of adjusted EPS between $5.30 and $5.50. We think this achievable; however, we expect Ecolab to come in near the bottom of the range. After updating our model to incorporate the most recent quarter, we are maintaining our $141 per share fair value estimate for Ecolab. Our wide-moat rating based on the company's switching costs remains firmly intact. With shares trading near our fair value estimate, we view Ecolab as fairly valued.In the industrial and institutional segments, segment operating income declined 2% in each segment after adjusting for currency and acquisitions as higher prices and volume were more than offset by increased raw materials costs. On the earnings call, management noted that there is generally a lag between cost inflation and the company's timing to increase prices. However, management expects price increases during the second half of 2018 and early 2019 to outpace raw materials inflation and drive profit growth. Given our view that Ecolab has a modest degree of pricing power, we think the company should be able to raise prices in its industrial and institutional segments to offset cost inflation.
Our long-term thesis that Ecolab's water business in its industrial segment will drive segment profit growth is intact. During the second quarter, the water business grew revenue 5% after adjusting for currency and acquisitions. Over the long term, we think Ecolab will continue to benefit from the secular trend toward water conservation because of a rise in global freshwater costs. This trend should propel Ecolab's water business toward high-single-digit growth from mid-single-digit growth over the next several years.
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.
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