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Ecolab: Acquisitions Bode Well, Lowered Forecasts a Concern

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On Nov 23, we issued an updated research report on St. Paul, MN-based Ecolab Inc (ECL - Free Report) – a leading provider of water, hygiene and energy technologies and services. The stock currently carries a Zacks Rank #3 (Hold).

Over the last 30 days, the Zacks Consensus Estimate for full-year 2016 earnings decreased by a penny to $4.41 per share. The stock recorded an earnings surprise of almost 0.8% in the last reported quarter and has a long-term expected earnings growth rate of 12.6%.

Ecolab recently ended its third quarter with adjusted earnings of $1.28 per share, ahead of the Zacks Consensus Estimate by a penny. However, the net sales figure was down 1.74% from the year-ago quarter and also lagged the estimate mark.

We are upbeat on the acquisition announcement of France-based Laboratoires Anios earlier this year. The buyout is expected to fortify Ecolab’s footprint and strengthen its institutional customer base and service coverage. Laboratoires Anios has a strong clientele and has presence in almost 85 countries. The company reported sales of almost $245 million (€220 million) in full-year 2015.

Ecolab’s considerable earnings growth despite the challenging business environment instills confidence. Additionally, the company's large base of recurring revenues, industry-leading technologies and excellent field service are significant propellers for long-term growth.

The company’s prospects in the Global Industrial and Global Institutional business segments are also bright. In the last reported quarter, sales at these segments scaled 2% and 6%, respectively, on a year-over-year basis.

However, on the flip side, Ecolab slashed its full-year guidance for adjusted earnings. Notably, the company expects earnings in the range of $4.35 to $4.45 per share, compared to the previously issued band of $4.35 to $4.50. Per management, unfavorable foreign currency and the impact of Venezuelan deconsolidation are expected to hurt earnings by 30 cents. Even for the fourth quarter, the company expects foreign exchange headwinds to impact earnings by approximately 2 cents per share.

Net sales at the Global Energy acquisition segment in the last reported quarter failed to impress. Notably, the segment decreased 8% in fixed currency, thanks to a decline in the company’s upstream business revenues.

Additionally, Ecolab’s current earnings yield of roughly 3.8% is lower than the industry average of 4.54%. Cut-throat market competition and integration risks are added concerns.

Key Picks

Better-ranked stocks in the broader medical space include HMS Holdings Corp. (HMSY - Free Report) , Medidata Solutions Inc. (MDSO - Free Report) and IDEXX Laboratories, Inc. (IDXX - Free Report) . Notably, HMS Holdings and Medidata Solutions carry a Zacks Rank #2 while IDEXX Laboratories sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

HMS Holdings Corp has a long-term expected growth rate of 14.26%. Notably, the company has a solid one-year return of roughly 58%.

Medidata Solutions has a strong one-year return of roughly 19.24%. The stock represents a long-term expected growth rate of 22.33%.

IDEXX Laboratories represents a solid one-year return of almost 71.07%. The company has a long-term expected growth rate of almost 14.96%.

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