Ecolab Earnings: Profit Growth Driven by Strong Pricing Power

Ecolab’s ECL third-quarter results exemplified our thesis that the company’s strong pricing power, which underpins our wide moat rating, would drive profit recovery and margin expansion. Operating income grew 17% year on year driven by higher prices, stable volumes, and lower costs, with profit growth in all segments.

We maintain our outlook that Ecolab’s ability to raise prices will fully restore profits from the COVID-19-related decline and subsequent cost inflation in 2021 and 2022. Accordingly, we continue to forecast Ecolab’s 2024 adjusted earnings per share will exceed 2019 levels, marking a full recovery. Having updated our model to incorporate third-quarter results, we maintain our $210 per share fair value estimate and wide moat rating for Ecolab.

Ecolab shares were up 5% at the time of writing as the market reacted favorably to Ecolab’s strong results and management’s outlook for solid profit growth in the fourth quarter of 2023 and in 2024. At current prices, we view Ecolab shares as undervalued, with the stock trading in 4-star territory and at more than a 20% discount to our fair value estimate. We forecast Ecolab’s profits will return to the stable growth that defined the company for nearly two decades prior to the pandemic. As the business delivers solid results, we think market sentiment will continue to improve, sending shares closer to our fair value estimate.

In the institutional business, which generates roughly 40% of profits, we see profits exceeding prepandemic levels next year. As the majority of this segment’s customers are restaurants and hotels, it was hit the hardest by the pandemic, with 2020 segments’ profits falling to roughly one third of 2019 levels. However, as volumes have largely returned, Ecolab’s business has made a full recovery, which is in line with our view over the past several years, that the profit impact of the pandemic would prove temporary to Ecolab.