Streetwise for Sunday, May 13, 2018
Alternating tides of enthusiasm and pessimism have once again swept over Wall Street, accompanied by the incessant clucking by Wall Street’s perennial bears about how the sky shall soon fall upon us all.
To the uninitiated the Dow must appear to be a creature spawned by the manufacturers of antacids. At the same time, there remains a tendency on the part of investors to want to focus on a hyperbole of various media opinions regarding market trends.
That is wrong. Concentrate your efforts on buying undervalued stocks, not market forecasts or history lessons. Specifically, you want information that will assist you in pinpointing individual companies that are hard at work at improving their positions in their respective marketplaces.
Consider the advice so often put forth by Peter Lynch, former manager of the Fidelity Magellan Fund. Lynch was a strong proponent of “the power of common knowledge.” In other words, confine your analysis to companies whose products you understand.
Everyone understands cleanliness and sanitation. Furthermore, one of the most recurrent sights nowadays is a bottle of Purell hand sanitizer. No, I am not suggesting you invest in GOJO Industries, the manufacturer of Purell. It is a private, family-owned company.
Instead you might want to consider Ecolab (ECL), a company founded by Merritt J. Osborn in 1923, and one I have never written about. The company engages in the delivery of products and services in the arenas of water, hygiene, and energy.
The company’s industrial division provides water treatment and process applications for industrial customers; and cleaning and sanitizing solutions for the food, beverage, and textile care industries.
The institutional division specializes in providing cleaning and sanitizing products to the food service, hospitality, lodging, and healthcare markets, while the energy division serves the chemical and water treatment needs of the petroleum and petrochemical industries.
Finally, the division labeled other refers to pest elimination and kitchen equipment repair and maintenance for restaurants and hotels.
In its recent release of fiscal 2018 first quarter performance, Ecolab reported GAAP earnings of 84 cents per share. Earnings adjusted for non-recurring expenses came in at 91 cents per share. The results exceeded Street expectations which had a consensus for adjusted earnings of 88 cents per share.
The company posted revenues of $3.47 billion for the period, exceeding the street’s consensus of $3.37 billion.
Looking ahead to the current quarter ending in July, Ecolab is forecasting per-share earnings of $1.23 to $1.29 per share, with the Street’s consensus looking for adjusted earnings per share of $1.27.
The company is projecting full-year earnings in the range of $5.30 to $5.50 per share. Ecolab shares have climbed nearly 8 percent since the beginning of the year and have increased 12 percent in the last 12 months.
Increased corporate overhead weighed heavily on total operating income during the first quarter. However, it includes a one-time $26 million investment in the Ecolab Foundation.
Factors that have affected results in recent quarters continued to exert their influence. The energy segment grew sales 9 percent year over year as global oil and gas production growth continued its 2018 momentum.
Management noted that although it expects pricing gains and volume growth across the board to continue, increased delivery costs will remain as headwinds throughout the year.
Ecolab has paid cash dividends for 79 straight years. It has been raising dividends for 25 of those years with an average annual dividend growth of 12.33 percent. Historically, the company is a strong late-cycle performer
The intrinsic value of the shares using a discounted free cash flow to the firm model is $171. My estimated earnings number for 2018 is $5.40 per share with a 12-month projected share price of $160 for a 10 percent capital gain. The shares recently closed at $145.49, and there is an indicated dividend yield of 1.12 percent.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.