Ecolab Inc. (ECL): A Good Company Like This Retains Customers

Peer comparison

Ecolab’s peers include Rollins, Inc. (NYSE:ROL) and The Clorox Co (NYSE:CLX).

Rollins, Inc. (NYSE:ROL) and Ecolab Inc. (NYSE:ECL) are among the largest players in the pest control industry, with Rollins being the top commercial pest control provider in the U.S. with about a fifth of the market share. Rollins, Inc. (NYSE:ROL)’ pest control business is relatively recession resistant and it is regarded as a leader in the area of bed bugs, which are increasingly a key concern among its customers.

Despite this, I am wary of investing in a pure pest control player given the seasonality of the business. Revenues for Rollins tend to be lower in the first and last quarter of the year coinciding with lower temperatures which are less conducive for pest infestation. This is validated by Rollins’ first quarter of fiscal 2013 results which were impacted negatively by increased snowfall. Management expects improved results in subsequent quarters on the back of warmer weather and increased pest activity.

The Clorox Co (NYSE:CLX) manufactures and sells household cleaners, laundry additives and infection control products. It is among the top two brands for 90% of its product portfolio and it has a cost advantage over its smaller competitors by virtue of economies of scale.

I am not considering The Clorox Co (NYSE:CLX), given that its reliance on domestic and developed markets and product categories with lackluster growth. For example, coal, which represented about 10% of Clorox’s revenues, is seeing decreased volumes with the increasing prevalence of gas grills. This is reflected in its fiscal 2014 growth rate guidance of between 2%-4%. I prefer a mix of stability and growth for my investments, which is something that Ecolab Inc. (NYSE:ECL) offers.

Conclusion

Ecolab enjoy high customer retention rates by virtue of its ‘razor and blade’ business model and mix of ‘need-to-have’ products. Ecolab’s financial track record is the best evidence of its high customer retention rates; given that it has been profitable and free cash flow positive for every year in the past decade. However, Ecolab is expensive at 20.4 times forward P/E and 1.6 times PEG. A forward dividend yield of 1.1% is also not sufficiently attractive. I will recommend investors to put this stock on their watchlist and wait for a better entry price.

The article A Good Company Like This Retains Customers originally appeared on Fool.com and is written by Mark Lin.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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