Ecolab – Not Clean Enough For Me, Despite An Interesting Purolite Deal (NYSE:ECL)

Ecolab (ECL) is a long term steady growth engine, which since I can remember has been trading at premium valuations, priced to perfection essentially. It is very much time to update my stance on the business as my last coverage on the stock dates back to 2014.

At the time Ecolab was a $15 billion giant (in terms of revenues) as its 307 million shares traded around $111 per share, for a $34 billion valuation, or valuation at 26 times adjusted earnings. The net debt load of $6.6 billion was manageable given a $2.4 billion EBITDA number, pushing up the enterprise valuation to some $40 billion.

A 26 times multiple is high, but perhaps reasonable in this interest rate environment, yet for 2014 it was quite steep, in part because the company has seen very strong growth in the decade before. Nonetheless, the valuation was quite demanding, too demanding to see any appeal.

Fast Forwarding – 2020

Taking a jump into time from 2014 to the present we see that shares have essentially doubled to $230 at this moment in time. While shares doubling in an 8 years time frame is not bad, it is not great either (considering what the market at large has done).

In February 2020 the company posted its 2019 results as sales of $14.9 billion were virtually in line with the 2014 revenues being reported. The company has seen a very modest reduction in the share count to 292 million shares, for a 5% reduction in the share count vs. 2014, as earnings were reported at $5.33 per share, again hardly up from the 2014 numbers, albeit that adjusted earnings came in at $5.93 per share. Net debt has been cut a bit, but at $6.0 billion, it was fairly stable compared to 2014.

Part of the lack of growth comes as the business decided in 2019 to spin-off Championx, as the business merged the chemical distributor with $2.4 billion in sales with Apergy in a deal valued at $4.4 billion, as that is equivalent to roughly a tenth of the market value of Ecolab. The company guided for earnings of $6.43 per share for 2020 ahead of the pandemic as valuations have risen considerably, trading just above the $200 mark at the time already.

The pandemic hit the business quite hard with full year sales in 2020 down 6% to $11.8 billion. Some real deleverage on this sales decline was reported with operating earnings down nearly a quarter, as adjusted earnings fell to $4.02 per share. While the healthcare & life science business thrived amidst the pandemic, this unit is responsible for rust roughly half of sales. The global industrial segment generates just over half of total sales and was posting flattish results, yet Ecolab was particularly hit hard in the global institution & specialty segment which saw roughly 20% revenue declines from a revenue base of nearly $4.5 billion in 2019.

In October 2021, the company posted its third quarter results for the year. Third quarter sales rose 10%, bringing the revenue growth through the quarter to 7%. This was comfortable although that some gross margin pressure was observed as the company posted earnings of $2.87 per share for the nine-month period, albeit that the adjusted number came in at $3.41 per share for the period. At this pace, the earning space come in at $4.60 per share, still translating in a nearly 50 times multiple at $230 here. The company here supports a $66.5 billion equity valuation, a valuation which even increases to $71.5 billion if we include net debt.

A Deal

Just after the release of the third quarter results, Ecolab announced the $3.7 billion acquisition of Purolite, a provider of high-value separation and purification solutions to life science and critical industrial markets. The company is set to add roughly $0.4 billion in revenues, as revenue growth is seen in the mid-teens in 2021.

This implies that roughly a 9 times sales multiple has been paid, with Ecolab itself trading around 5.5 times sales, as it trades at very high earnings multiples, as discussed above. Somewhat comforting, present value of tax synergies are pegged at $300 million, with accretion seen at ten cents in 2023, with no contribution seen to 2022 earnings per share. The deal presentation was a bit more insightful as adjusted operating income margins of 37% are seen on $390 million in sales, for an $144 million operating earnings contribution. This implies that Ecolab is paying 25 times operating earnings, actually below its own valuation. The mid-teens growth rate seen in 2021 is comfortable as well, but just like Ecolab it might be the case that Purolite has benefited from easier comparables as well.

In all honesty, even as $3.7 billion deal is just a bolt-on deal for Ecolab. With a >$70 billion enterprise value, the purchase of Purolite is equal to just over 5% of the value of Ecolab, a true bolt-on deal, certainly as the deal will only boost sales by about 3%, yet it does minimally improve the growth profile.

That is needed after Ecolab has been seen as a real growth engine, even aligned with ESG here, yet despite the positioning to water, hygiene and infection prevention, I am not at all impressed with the organic pace of growth over the past year.

Hence, I can only conclude that while the deal looks perhaps interesting, although that it comes at a price, that the overall appeal is hard to be seen at more than 50 times current earnings, making it easy to shy away from Ecolab.