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Morningstar | Maintaining $180 FVE as Ecolab Reports Solid 1Q Results; Shares Fairly Valued

Ecolab reported solid first-quarter results, as operating income grew 9% year on year to $452 million on a fixed-currency basis, driven primarily by the industrial segment. In the earnings release, management maintained its 2019 adjusted EPS guidance of $5.80 to $6.00. We continue to think this is achievable. We forecast that Ecolab will come in toward the high end of management's range. With our outlook largely unchanged, we maintain our $180 per share fair value estimate for Ecolab. Our wide moat rating is also intact.

In the industrial segment, operating income grew 21% year on year to $147.5 million during the quarter on a fixed-currency basis, due to higher volumes and cost reductions. In the water business, which generates the majority of industrial segment sales, revenue was up 8% year on year after adjusting for foreign exchange and acquisitions. This is in line with our average forecast over the next decade, as we see greater demand for Ecolab's industrial water management systems resulting from rising fresh water costs. As the industrial water business continues to grow, we expect it to contribute of 40% of Ecolab's total profit growth over the next decade.

In the energy segment, operating income grew 14% year on year to $78.4 million during the quarter on a fixed-currency basis. On the earnings call, management reiterated plans to spin off the upstream energy business, which sells products to oil producers and oil-services providers, by mid-2020. We are in favor of the spin-off, as this business is closely tied to oil prices and we think it would run better as a stand-alone operation that allows for greater management focus and optimization. We are in favor of management retaining the downstream business, which sells products and services to refiners and petrochemical producers, as it operates in a more similar manner to Ecolab's industrial business.

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."