Ecolab Inc. (NYSE:ECL) is one of the most reliable businesses that money can buy. Although its dividend yield is low (1.4%), the ompany’s long-term growth outlook is outstanding and supported by ECL’s moat (90% recurring revenue in the form of essential consumables; entrenched customer relationships; twice as large as its next biggest competitor; 25,000 customer-facing employees).
We look for these types of business for our Long-term Dividend Growth portfolio and believe that weak energy markets, currency headwinds, and sluggish global growth could be providing a buying opportunity.
At the end of September, 2015, 26 funds from the Insider Monkey database held around 6.60% of ECL’s outstanding stock, amassing stakes worth $2.14 billion in aggregate. This compares with 23 funds holding long positions with a total value of $2.25 billion at the end of June. Boykin Curry’s Eagle Capital Management and Bill & Melinda Gates Foundation Trust are the two largest shareholders of ECL among the funds followed by Insider Monkey, reporting stakes worth 9.07 million shares and 4.37 million shares, respectively, in their last 13F filings.
Business Overview
ECL’s sells a wide range of sanitizers, cleaners, lubricants, cleaning systems, dispensers, water treatment products, and on-site services that are used by customers in virtually every industry (e.g. restaurants, hotels, hospitals, laundromats, manufacturing plants, oil wells, etc.) to keep their food safe, maintain clean environments, and optimize water and energy use.
To give you an idea of ECL’s scope of business, during 2014 the company helped customers wash more than 31 million hands, clean dairy operations to help process 330 billion glasses of milk, process 1.2 billion loads of laundry, manager water on 100 offshore oil platforms, wash more than 146 billion plates, and manage 14 trillion liters of water. Overall, ECL is in more than 1 million customer locations in 172 countries around the world.
The company merged with Nalco in 2011 in an $8 billion deal to become the global leader in water, hygiene, and energy technologies and services. This deal increased the company’s exposure to industrial markets, which are big users of water treatment products, and helped ECL serve customers more comprehensively. In 2013, ECL acquired Champion Technologies for $2 billion to significantly enhance its position in the upstream energy services market.
By geography, ECL generated 56% of its 2014 revenue in North America, 24% in Europe, Middle East and Africa, 12% in Asia Pacific, and 8% in Latin America.
Segments
Global Industrial (35% of 2014 sales): provides water treatment and process applications, and cleaning and sanitizing solutions primarily to large customers within the manufacturing, food and beverage processing, chemical, metals and mining, power generation, pulp and paper, and laundry industries.
Global Institutional (30% of sales): provides specialized cleaning and sanitizing products to the foodservice, hospitality, lodging, healthcare, government, education, and retail industries.
Global Energy (30% of sales): serves the process chemical and water treatment needs of the global petroleum and petrochemical industries in both upstream and downstream applications. The biggest piece of the business is oil fuel chemicals that treat reservoirs (e.g. kill bacteria, prevent corrosion, clean water).
Other (5% of sales): provides pest elimination and kitchen equipment repair and maintenance.
Business Analysis
ECL is a unique business. The company has a large portfolio of valuable and protected technologies (over 6,700 patents) that allow it to sell its solutions at 10-20% price premiums compared to competitors’ offerings. While the initial cost is higher, the savings that these products deliver over time (e.g. less waste, more energy efficient, more reliable) make them cheaper.
However, ECL’s main competitive advantages are its dependable service quality and people. At the end of the day, ECL is selling service and consistency (e.g. food needs to be kept safe, water needs to be kept clean, etc.).
ECL has around 47,000 employees, and a whopping 25,000 are customer-facing. These employees visit more than a million customer sites in 172 countries each year to provide service. These frequent touchpoints reinforce the value of ECL’s unique products and systems being used by the customer.
On-site visits also enable numerous growth opportunities for the company. ECL’s service-driven business model allows it to pursue a unique growth strategy that it calls, “Circle the Customer – Circle the Globe.” Essentially, ECL realizes that its customers are spending about $6 on addressable products for every $1 they spend with ECL (the company’s addressable market is $100 billion in size and highly fragmented; ECL is the largest player with 14% market share share).
