Ecolab Earnings: Pricing Gains Drive Profit Growth as Cost Inflation Subsides

We maintain our $210 per share fair value estimate for Ecolab ECL after incorporating the company’s first-quarter results into our valuation model. Our wide moat rating is also unchanged.

Ecolab shares were up 2% on the day, while the broader market was down over 1%, as adjusted operating income grew 19% year on year and management maintained its outlook for a return to strong profit growth in 2023. We view Ecolab shares as undervalued, with the stock trading in 4-star territory and nearly 20% below our fair value estimate. Ecolab has begun to restore its profits, which declined in 2022 due to cost inflation headwinds.

Prices were up 13% during the quarter, which exemplifies our thesis that Ecolab’s strong pricing power would be able to overcome cost inflation over time. With raw materials costs likely to begin to decline by the end of the year, Ecolab is well positioned to maintain profit growth as much of the nonenergy surcharge price increases should remain in place. This should result in profit growth and margin expansion throughout the remainder of 2023 and into 2024. As the profits grow and margins expand, we think market sentiment will continue to improve, driving shares closer to our fair value estimate.

In the industrial segment, the water business grew 14% year on year versus the prior year quarter driven by price increases and new business wins. Over the long term, the water business is positioned to benefit from a growing market for water reduction and water recycling technologies as Ecolab can offer customers a net cost savings after the cost of Ecolab’s products. This should drive industrial profit margins from 14% in 2022 to over 20% in the long term.