Top Picks 2021: Ecolab (ECL)

01/14/2021 5:00 am EST

Focus: TECHNOLOGY

David Coleman

Quantitative Portfolio Strategist, Argus Research

Ecolab (ECL) is a leader in water, hygiene, and energy technology and services. The company delivers comprehensive solutions to promote safe food and maintain clean environments, explains David Coleman, of Argus Research, a leading independent Wall Street research firm.

The firm's solutions also optimize water and energy use, and improve operational efficiency for customers in the food, healthcare, energy, hospitality, and industrial sectors.

In our view, the company has prospects for above-average revenue and earnings growth over the long term, though current estimates have been revised lower due to economic uncertainty. On the other side of the pandemic, we expect Ecolab’s water treatment, sanitation, and healthcare cleaning services to be in strong demand.

 The company continues to tweak its portfolio of businesses to optimize growth, and management has divested a lower-margin segment, which should boost profitability in 2021-2022. Ecolab has a clean balance sheet and an impressive history of dividend payments and growth.

The shares are a suitable core holding from the Materials group in a diversified portfolio. Non-fundamental selloffs often represent good buying opportunities for this diversified company.

We think that ECL shares are attractively valued at current prices near $225. Ecolab shares have traded between $124 and $231 over the past 52 weeks and are currently at the high end of the range.

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From a technical standpoint, prior to the pandemic, the shares had been in a bullish pattern of higher highs and higher lows that dated from February 2016. Since the pandemic, the positive pattern has re-emerged.

On the fundamentals, the shares are trading at 42-times our 2021 EPS forecast, compared to a five-year annual average range of 20-45. They are also trading at a trailing price/book multiple of 6.8, above the midpoint of the historical range of 3.0-7.5; and at a price/sales multiple of 4.4, at the high end of the historical range of 1.6-4.4.

Our dividend discount model, factoring in the latest dividend hike, renders a fair value near $275 per share. Blending our approaches, and discounting multiples to reflect the current market uncertainty, we maintain our "buy" rating and arrive at a revised price target of $250.

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