Citi Upgrades Ecolab, Citing Its Defensive Portfolio And Energy Segment Growth

Ecolab Inc’s ECL Energy business seems to be approaching an inflection point, Citi’s P.J. Juvekar said in a report. He upgraded the rating on the company from Neutral to Buy, while raising the price target from $127 to $141.

Robust Growth In Defensive Portfolio

Ecolab Energy business contributes ~25 percent of the company’s total sales. This business seems poised for an inflection point, Juvekar commented. He added “With ECL, you get the “cyclical kicker” of energy plus the defensive growth characteristics of its core Institutional cleaning and Industrial businesses.”

The analyst projected ~15 percent EPS growth in 2017, driven by:

• Continued Growth in Core Defensive Businesses: These businesses would likely generate mid-to-high single-digit growth, via continued market share gains. While Ecolab has outpaced the Institutional market via higher growth in QSR, the Industrial segment is supported by growth in Water Treatment.
• Energy Inflection Point: The energy segment growth could accelerate, against low comps, and boost the earnings growth of the defensive business. Following cost cutting, there could be a significant improvement in incremental margins. The Energy segment is expected to generate y/y operating income of 35 percent in 2017.
• Flexibility Due to a Healthy Balance Sheet: Juvekar projected modest top-line and profitability growth through bolt-on M&A, buybacks and margin expansion from productivity initiatives.

“Our buy rating is not driven by an expectation of a sharp recovery in oil prices. Rather we think it will be easier for ECL's energy business to grow off trough levels with a modest recovery in oil production,” the analyst wrote.

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