Profits Will Be Flowing at Ecolab

Seth Goldstein: Ecolab is well known for its cleaning products sold to restaurants and hotels. However, a lesser known part of Ecolab's business is its water-management systems that reduce customers' water and energy expenses.

Fresh-water consumption continues to exceed readily available supply. As a result, by 2030, we forecast that fresh-water costs will double as water will have to be pumped from greater depths at an increased expense in order to meet demand.

As water costs rise, the value proposition offered by Ecolab's water-management systems also improves. Amid a significant demand boost, we forecast the water business to generate over 40% of companywide profit growth over the next decade.

Ecolab's wide moat rating stems from customer switching costs underpinned by a classic razor-and-blade business model. The company's direct-selling model also focuses on cross-selling products. Thanks to cross-selling potential, the company's foray into water treatment will continue to help Ecolab capture new customers even for its legacy product suite. As Ecolab is able to reduce its customers' expenses and increases influence as a key supplier, the firm becomes deeply ingrained into its customers' business model. This makes it very costly for a customer to switch to another company.

At its current share price, we think Ecolab is fairly valued relative to our $180 per share fair value estimate.