Morningstar | Few Surprises In Ecolab's Detailed Results; Maintaining $146 FVE With Outlook Largely Unchanged
Ecolab reported detailed fourth-quarter 2018 results that were in line with our expectations as higher prices drove operating income growth in all segments after adjusting for currency and acquisitions. The company previously reported high-level results on Feb. 4. With our outlook largely unchanged, we maintain our $146 per share fair value estimate and our wide-moat rating on Ecolab.In the industrial segment, which includes the water business, operating income grew 5% year on year during the quarter to $240 million adjusted for currency and acquisitions. A driver of the higher profits was 8% sales growth in the industrial water business. In providing its outlook for 2019, management pointed to continued growth for the water business, which is in line with our outlook. We view the water business as a long-term growth driver for Ecolab. As fresh water costs increase, we forecast that demand will rise for Ecolab's water treatment products that reduce customer water use.
In the institutional segment, operating income grew 9% year on year to $284 million adjusted for currency and acquisitions, as higher prices and volumes were partially offset by increased costs. Going forward, we expect the institutional segment to benefit from two long-term trends. First, the rise in fresh food sales from quick service restaurants and other food retailers creates demand for Ecolab's cleaning products as fresh food requires more frequent cleaning to maintain food safety. Second, as Ecolab increases its product offerings to hospitals, the company should be able to sell more products and services per location for its healthcare customers. This is similar to the company's ability to cross-sell products to its restaurant and hotel customers in the institutional segment as Ecolab built out its product lines for those customers. In turn, these trends should drive profit margin expansion from just under 20% in 2018 to our midcycle (2023) forecast of 23%.
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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