Morningstar | Raising Our Ecolab FVE to $180 as Rising Fresh Water Costs Boost Industrial Water Treatment Profits
We are increasing our Ecolab fair value estimate to $180 per share from $146. This follows our in-depth analysis of the impact of rising fresh water costs on profit growth for Ecolab's industrial water business. Our wide-moat rating remains intact. At current prices, we view Ecolab as fairly valued. However, our outlook for Ecolab sits above the current median consensus estimates of $169 per share.By 2030, we expect fresh water costs to rise globally and double in the U.S. As fresh water costs increase, industrial manufacturing businesses across nearly all industries will be incentivized to install and use water management systems in order to reduce water use and operational expenses.
Ecolab, the industry leader for water management systems, is well positioned to benefit from this growing demand. At current water prices, Ecolab's water management systems provide some cost savings to customers. As water costs double, however, the value proposition of water management systems will improve significantly.
Due to higher profits from Ecolab's water business, we expect industrial segment profit margins to expand from the mid-teens in 2018 to just above 20% over the next decade. This level of profitability is in line with Ecolab's institutional business, where the company's value proposition for its cleaning and sanitation products and services is already established.
Separate from our fresh water thesis, we also revisited our assumptions for the institutional segment. We expect two favorable trends to play out: increased consumer preferences for fresh food and a rise in the number of long-term care facilities. From a cleaning and sanitation perspective, a rise in fresh food creates supply chain complexity that Ecolab is well positioned to help manage. As the baby boomer generation ages, we see greater demand for long-term healthcare facilities, which will benefit Ecolab as a supplier. These trends will drive an average 6% annual profit growth over the next decade.
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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