Ecolab Earnings: Pricing Gains Drive Profit Recovery and Margin Expansion

Ecolab’s ECL second-quarter results exemplified our near- and long-term outlook for the business. Adjusted operating income was up 21% versus the prior-year quarter, including 130 basis points of margin expansion. This is consistent with our near-term view that the company’s strong pricing power, which underpins our wide moat rating, would restore profit growth after cost inflation weighed on 2022 results.

Similarly, in the industrial segment, the water business, which generates the majority of segment revenue, saw sales grow 10% versus the prior-year quarter. This is consistent with our long-term view that the water business will generate high-single-digit to low-double-digit average annual revenue growth over the next decade, as rising freshwater costs create the business case for manufacturing plants to install Ecolab’s water management systems, which creates a stream of recurring revenue for Ecolab.

With our forecast largely unchanged, we maintain our $210 per share fair value estimate for Ecolab. The market reacted favorably to the earnings results and management’s outlook for double-digit adjusted EPS growth to continue in the second half of 2023, which we view as achievable.

At current prices, we view Ecolab shares as undervalued, with the stock trading in 4-star territory, at a little more than 10% below our fair value estimate. Shares are up a little less than 30% year-to-date as the market has reacted favorably to Ecolab’s profit restoration from the pandemic and cost inflation. While shares no longer offer the discount that they did at the beginning of the year, we still see further upside relative to our fair value estimate.