Ecolab Inc. (ECL - Free Report) has had a dismal run on the bourses of late. Over the last three months, the company has returned 0.9%, below the S&P 500’s 3.4%.
Intensifying competition, foreign exchange volatility, higher raw material costs and integration risks are primary headwinds for the company as of now. Let us take a look at the other major factors that have been impeding Ecolab’s growth trajectory.
Ecolab Grapples With Issues
Hurricanes Deal a Blow: Various reports suggest that the Hurricanes dealt a heavy blow on all MedTech majors. Ecolab is no exception in this regard, with forced shut downs of three manufacturing plants in Houston area. Management at Ecolab estimates third-quarter adjusted diluted earnings per share at the low end or slightly below the previously forecasted band of $1.36 to $1.44. For the full year, Ecolab expects adjusted earnings at the low end of the previously issued $4.70 to $4.90 range.
Divestiture: Despite yielding stellar returns last year, in August, management at Ecolab announced that last quarter has been a quiet one for its Equipment Care business, which registered just 2% growth on a year-over-year basis.
Adding to the woes, the segment ran short of manpower in the recent past. As a result, Ecolab announced plans to divest Equipment Care 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).
Diversified offerings like Equipment Care have lent Ecolab a competitive edge in the global market so far. Although the divestiture plan would enhance the company’s focus on core businesses, it is also likely to mar net revenues (read more: Ecolab to Divest Equipment Care Segment, Shares Fall).
Falling Estimates: The estimate revision trend for Ecolab has been unfavorable. For the full year, four analysts moved north compared to one movement in the opposite direction over the last two months. As a result, full-year estimates declined 1.5% to $4.73 per share.
For the current quarter, two analysts moved north, compared to five movements in the opposite direction over the same time frame. As a result, the Zacks Consensus Estimate for current-quarter earnings dropped 4.2% to $1.36 per share. The stock has a Zacks Rank #4 (Sell).
Stock Looks Expensive: Ecolab’s stock looks a bit overvalued at the moment. A comparative analysis of the company’s forward P/E (F12M basis) ratio reflects a relatively gloomy picture that might be a cause for investor concern. The ratio currently stands at 25.6, significantly stretched when compared with the S&P 500's P/E ratio of 18.6.
Furthermore, the stock is overvalued when compared to peers. This is because the current P/E ratio (F12M basis) for the broader industry is at 18.8.
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 sport 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% last quarter. The stock has a long-term expected earnings growth rate of 16.3%.
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