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Ecolab (ECL) to Divest Equipment Care Segment, Shares Fall

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Ecolab Inc. (ECL - Free Report) recently announced plans to divest its Equipment Care segment to Audax Private Equity. Growing in upper single digits, the segment witnessed strong sales of $180 million in 2016 (almost 1.4% of net sales).

The transaction is subject to regulatory clearance and is expected to close by the fourth quarter. Other terms of the agreement have been kept under wraps.

It is important to note that Ecolab’s programs and services help in promoting safe food, maintaining clean environment, optimizing water and energy use and improving operational efficiencies for customers in the food, energy, healthcare, industrial and hospitality markets in more than 170 countries.

Share Price Falls

Shares of Ecolab declined 0.3% to close at $132.55 following the news release. In fact, over the last year, Ecolab has been trading below the market at large. The stock has returned 13.2%, below the S&P 500’s return of 18.6%. The current level is also a bit lower than the broader industry’s return of 13.6% over the same time frame.

In fact, the Zacks Consensus Estimate for the full year dropped 1.5% to $4.73 per share in the last two months. As a result, Ecolab has a Zacks Rank #4 (Sell), signifying probabilities of underperformance in the near term.



Equipment Care Segment at a Glance

The Equipment Care segment has been offering commercial kitchen equipment maintenance for Ecolab over the last 90 years. Despite yielding stellar returns last year, in August, management at Ecolab announced that its equipment care business has been witnessing a quiet period lately, registering just 2% growth on a year-over-year basis in the last quarter. Adding to the woes, the segment ran short of manpower in the recent past.

Apart from being a leading player in the Chemical-Specialty space, comprehensive and diversified offerings like equipment care have lent Ecolab a competitive edge in the global market.

We believe the divestiture will enhance Ecolab’s strategic focus on core segments like Global Industrial, Global Institutional and Global Energy. However, it is difficult to gauge the impact of the divestiture on Ecolab’s full-year results, at least for now. In this regard, Ecolab had provided full year guidance of adjusted diluted earnings per share in the band of $4.70 to $4.90 earlier.

Key Picks

A few better-ranked stocks in the broader medical sector are SONOVA HOLDING (SONVY - Free Report) , IDEXX Laboratories, Inc. (IDXX - Free Report) and Luminex Corporation (LMNX - Free Report) . SONOVA and Luminex have a Zacks Rank #1 (Strong Buy), while IDEXX Laboratories has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SONOVA represented a solid return of 14.5% over the last year. The company has a long-term expected earnings growth rate of 7%.

IDEXX Laboratories has an average earnings beat of 9.3% over the trailing four quarters. It has a long-term expected earnings growth rate of 19.8%.

Luminex came up with a positive earnings surprise of 188.9% in the last quarter. The stock has a long-term expected earnings growth rate of 16.3%.

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