Ecolab Is A (Good) Investment In The Reopening

Ecolab Is Stronger Than It Once Was

We don’t want to imply that Ecolab (NYSE:ECL) was ever a weak company because it wasn’t but it is one emerging from the pandemic in better shape than when it struck. The company has been pursuing cost-cuts and repositioning efforts to better-serve the new “normal” and those efforts are paying off. While business is still impacted by the pandemic the company is in a position to leverage its revenue into accelerated earnings growth once the reopening gets underway. And get underway it shall as the forecast for vaccinations is improving daily.

Ecolab Misses On The Top And Bottom Lines

Ecolab missed the Q4 consensus on the top and bottom lines but there are a couple of takeaways to consider we think will mitigate the miss. The first is that the $3.07 billion in net revenue only missed by a128 basis points, that’s not too bad considering the company’s business is heavily impacted by the virus. The hospitality/restaurant segment of the business is the lion’s share of revenue and one yet to truly rebound, and one expected to rebound strongly when it does.

The second is that revenue is up on a sequential basis with YOY declines quickly dissipating. On a YOY basis, the -5.2% reported is much better than the -28% and -20% reported in the 2nd and 3rd quarter of the year which puts a return to growth well within sight. The third takeaway is that there is only one more quarter of tough comps. Comps in the fiscal 2nd quarter will be against COVID-impacted results which set the company up for robust YOY revenue and earnings growth. Finally, with the rebound expected to begin in the 2nd quarter both 2021  revenue and earnings growth will likely outpace consensus all year.

On the bottom line, the GAAP and Adjusted EPS both missed by slim $0.02 margins but there is a takeaway to consider here, as well. The company’s earnings were impacted by the pandemic but are positive and cash flow is growing. Not only that but the company’s free-cash-flow is running near 80% of income and growing as well.

“We expect to see the beginning of the COVID-19 recovery in our global end markets starting in the second quarter but believe it will take several quarters to fully realize a new normal ... we believe that our strong new business wins, product and service innovation, investments in new hygiene and digital technologies, and successful sales and profit initiatives will deliver full year 2021 earnings above 2019 results ... with the first quarter year-on-year percentage decline showing modest sequential improvement from the fourth quarter and the remaining quarters of 2021 showing strong year-on-year growth,” said Christophe Beck, Ecolab’s president and chief executive officer.

Ecolab Has A Safely Growing Yield

Ecolab is a Dividend Aristocrat with nearly 30 years of consecutive increases in its dividend history. That alone speaks volumes to the dividend’s safety if not the yield which is roughly 0.90% with shares trading near $215. While we think the yield is a bit low it is compounded by a positive outlook for growth. The last two increases have been below average in the face of improving cash-flow which makes us think a larger than average increase could be in the works. The next increase is due in December of 2021. Until then investors can sleep well knowing the payout from Ecolab is safe.

The Technical Outlook: Ecolab Is Another Range-Bound Stock

Shares of Ecolab have been in a trading range since hitting the summer-2020 high and appear to be stuck in that range. The company’s Q4 results and 2021 outlook did little to catalyze the market and now shares are dipping. IN the near-term, investors might expect to see this stock move lower and test the mid-point of the range if not lower levels. The mid-point of the range is near the $200 mark, a move below that level may lead the stock down to the low $180’s.