Fresh water consumption continues to exceed readily available supply. Our outlook for rising fresh water costs portends smaller profits for a wide variety of manufacturing companies that consume high volumes of water. However, these companies can mitigate margin contraction with the use of water management systems. Ecolab (ECL) is a market leader in water management and is well positioned to take advantage of the growing need for water treatment. Our research indicates that the value proposition of Ecolab’s water treatment solutions will improve significantly in the coming years.
Ecolab’s water business might be considered noncore by some, as the company is better known for its cleaning and sanitation solutions. However, we expect the water treatment business to generate 40% of the company’s incremental profits over the next decade. We think the magnitude of this contribution is somewhat underappreciated by the market, even as market-implied expectations for the legacy operations remain lofty. Trading at 17.7 times forward EBITDA, the company’s multiple seems befitting of the wide moat rating we assign. Ecolab’s economic moat is built on customer switching costs underpinned by a razor-and-blade business model.
Seth Goldstein, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.