Ecolab: Investor Day Highlights Long-Term Growth Strategy

We maintain our $210 per share fair value estimate for Ecolab ECL following the company’s investor day. Our wide moat rating is also unchanged.

Ecolab shares were down slightly on the day, we think due to management’s lack of formal long-term guidance targets. While the company guided to long-term financial objectives of 5% to 7% annual revenue growth and reiterated the objective to generate a 20% operating margin, no specific years were provided as to when management expects this to occur. However, in our view, the more important takeaway was that Ecolab is well positioned for long-term growth and margin expansion, which is in line with our previous forecast. Accordingly, we view Ecolab shares as undervalued, with the stock trading in 4-star territory at more than a 15% discount to our fair value estimate.

The event confirmed our view that the water business will be the largest profit growth driver in the coming years. As fresh water demand continues to grow, rising water costs will create strong opportunities for Ecolab’s water management business. We expect revenue in this business will grow at a mid- to high-single-digit growth rate while generating margin expansion as Ecolab is able to cross-sell higher-margin products and services over time.

Additionally, we came away from the event with a better view of the life sciences business, which is currently a far smaller part of Ecolab but should be one of the fastest growing businesses across the company. Here, Ecolab aims to win business by positioning itself as a one-stop shop for life sciences suppliers’ cleaning, sanitation, and purification needs. As an aging Western population demands more pharmaceuticals, Ecolab should see demand for its products grow accordingly.