St. Paul-based Ecolab's Recent Acquisition Extends Reach in China

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Jul 13, 2015

In this article, let's take a look at Ecolab Inc. (ECL, Financial), a $33.43 billion market cap company, which is a leading worldwide marketer of water, hygiene and energy technologies and services for the foodservice, food processing, hospitality, health care, industrial and oil and gas markets.

Strategic acquisitions in China

In 2011, Ecolab acquired Nalco Holding Co., a leading industrial water services provider, to serve the Chinese market. Two years later, it was the turn of privately held Champion Technologies. The deals have added water and energy-focused businesses, while incorporating cyclicality with the addition of the energy segment.

The past month, a new acquisition was made. It acquired a controlling interest in Jianghai Environmental Protection Co. Ltd. headquartered in Changzhou, China. The company is an industrial water treatment company so it will complement Ecolab´s operations and increase its water management business in China. The deal should contribute to its long-term growth opportunities in that market.

“Jianghai’s excellent reputation, size and product and service offerings complement and expand our water treatment business in China. Both companies are known for their service-oriented, problem-solving approach to optimizing customer operations and profitability,” said Ecolab Chairman and CEO Douglas M. Baker, Jr.

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 27.53x, trading at a premium compared to an average of 19.10x for the industry. To use another metric, its price-to-book ratio of 4.89x indicates a premium versus the industry average of 1.63x while the price-to-sales ratio of 2.40x is above the industry average of 1.03x. These metrics indicate that the stock is relatively overvalued and subject to a potential sell recommendation.

Final comment

The company operates in a competitive industry from regional as well as local companies. Ecolab´s revenues of $14 billion represent more than 10% of the global market. The firm has focused on expanding its customer base and its products and services worldwide.

Although a major risk of Ecolab is that customers are affected by changes in travel and dining activities, it has a significant foreign currency exposure with about half of sales generated outside the U.S., mainly one-fourth in Europe, Middle East and Africa, and another one-quarter in Asia Pacific, Latin America and Canada.

We believe the recent Jianghai booked revenues of $90 million (EUR 80m) in 2014 acquisition will improve scale while extending the competitive advantages. The Chinese company recorded revenues of $90 million in 2014. Looking at the future, we believe the company will benefit from this deal increasing water´s business in China. Ecolab will serve customers in China through both Jianghai and Nalco, while the latter is more exposed to volatile raw material costs, the former is a relatively smaller player that should provide an attractive opportunity for further growth in order to generate steady revenues.

Hedge fund guru Steven Cohen (Trades, Portfolio) initiated a new position in the stock in the first quarter with 25,000 shares. Other bullish movements were made from Louis Moore Bacon (Trades, Portfolio), Jim Simons (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Bill Frels (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned