Morningstar | Maintaining Ecolab's $141 FVE Despite Lower 2018 Guidance as Long-Term Outlook Remains Intact
Ecolab reported mixed third-quarter results as revenue growth was more than offset by increased raw material costs and unfavorable foreign exchange movements. In its earnings release, management lowered 2018 adjusted EPS guidance from a range of $5.30-$5.50 per share to a range of $5.20-$5.30 per share due to the higher raw material costs. We note that a couple quarters will likely have to pass before the company will fully pass on raw material cost inflation of this magnitude.While we've lowered our 2018 adjusted EPS forecast to $5.20 per share from $5.35 per share, our long-term outlook remains intact. As such, we maintain our $141 per share fair value estimate. Our wide moat rating is also unchanged. At current prices, we view Ecolab as slightly overvalued.
In the global industrial segment, operating income grew 3% on a fixed currency basis due to higher sales. This is despite operating margin compression of nearly 70 basis points stemming from higher raw material costs. However, water treatment sales within the industrial segment grew 7% year on year, which is in line with our long-term thesis. Water treatment sales to industrial customers generate roughly 28% of Ecolab's total sales. As fresh water costs continue to rise, Ecolab will benefit from growing demand for water treatment products from industrial manufacturers. Going forward, we continue to forecast mid- to high-single-digit revenue growth rates for Ecolab's water business.
In the global institutional segment, operating income grew roughly 6% year on year on a fixed currency basis, driven by higher sales to quick service restaurants and institutional customers such as large restaurant chains and hotels. Margins remained flat on a fixed currency basis at 21.8%. Because most of Ecolab's sales in the institutional segment are recurring orders of soaps and detergents that are delivered frequently throughout the quarter, Ecolab can quickly pass along raw material cost inflation more quickly.
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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