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Shares of Ecolab Inc. (ECL - Analyst Report) reached a 52-week high of $72.00 on Thursday, November 29, 2012. The closing price of this dental equipment stock as of September 28, 2012 was $71.81, which represented a solid year-over-year return of 31.2%.

Growth Drivers

Several factors such as the company’s solid third quarter results, the recent acquisition of Champions Technologies, the divestment of Vehicle Care and new product launches are driving the stock.

On October 30, 2012, Ecolab reported adjusted earnings per share of 87 cents, representing a 16% jump from the year-ago earnings of 75 cents per share. Despite the restructuring and integration expenses related to the Nalco merger, profit attributable to Ecolab in the reported quarter climbed 54% year over year to $238 million (or 80 cents per share).

On a fixed currency basis, revenues grew 7% in comparison with the year-ago pro forma fixed currency sales (inclusive of the Nalco operations). Growth was triggered by higher sales from Global Energy, Healthcare, Latin America and worldwide Kay as well as the Pest Elimination franchises.

Moreover, in an effort to expand its Global Energy Services franchise, Ecolab agreed to acquire privately-owned Champion Technologies and its related company Corsicana Technologies for $2.2 billion, in cash and stock. This is Ecolab’s biggest acquisition since the company acquired Nalco in 2011.

The acquisition of Champion Technologies is likely to strengthen Ecolab’s market position and help the company benefit from one of the fastest growing industries in the U.S. Following the closure, the company is slated to become a giant in the oilfield chemical business.

The buyout will enhance Ecolab’s operating scale in North America. Moreover, the correlated technology and consumer base ensure that the deal is a strategic fit for the company as the combined venture will be well-positioned in the global energy market.

Ecolab envisages incremental returns as reflected in its higher expected return on invested capital. Despite the high cost, the deal structure will enable Ecolab to maintain a strong investment grade balance sheet as the company expects to return to ‘A range’ metrics within three years.  

Further, as the company gains competitive advantage and makes headway in the energy market, the divestment of its under-performing Vehicle Care division will allow it to direct resources and focus on high growth avenues. Ecolab has agreed to sell its Vehicle Care division to Atlanta, Georgia-based Zep Inc. (ZEP) for roughly $120 million in cash.

Moreover, de-leveraging remains a looming concern for Ecolab due to long-term debt of $4.9 billion and a $1.7 billion cash payment for the latest acquisition. Thus, the sale of the Vehicle Care division will garner additional funds for the company.

New innovative products such as the latest range of USDA BioPreferred and Green Seal certified bio-based hard surface cleaners, along with the KAY Filter Pouch Cleaner and the Greaselift non-corrosive and biodegradable kitchen degreasing solution are slated to drive segment sales.

Earnings Estimate Revision

For fiscal 2013, the Zacks Consensus Estimate rose by 2.3% over the last 60 days to $3.59 per share, implying year-over-year growth of 20.31%.

Valuation

The company currently trades at a forward P/E of 24.1x, a 55.5% premium to the peer group average of 15.50x. The price-to-book ratio of 3.50x represents a 12.5% premium to the peer group average of 3.11x. Given Ecolab’s strong business fundamentals, the premium is justified.

Ecolab has a trailing 12-month ROE of 13.5% compared with the peer group average of 18.0%.

About the Company

St. Paul, Minnesota-based Ecolab serves the food service, food and beverage processing, healthcare, energy, water treatment and hospitality markets both in the U.S. as well as internationally. The company continues to invest in strategic areas such as health care, food, water and energy and global pest elimination to expand its business.

Although we are impressed by Ecolab’s strong international exposure, we remain cautious about currency fluctuations and aggressive competition from the likes of Clorox (CLX - Analyst Report) and Church & Dwight (CHD - Snapshot Report). Raw material price inflation also remains a headwind.

We currently have a ‘Neutral’ recommendation on Ecolab. The stock carries a short-term Zacks #3 Rank (Hold rating).
 

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