Ecolab Inc. (NYSE:ECL) is a $19 billion market cap cleaning products company whose products include kitchen cleaners, sanitizers, and antimicrobial products. According to our database of 13F filings, the largest hedge fund holder of Ecolab at the end of June was Eagle Capital Management; the fund reported a position of 8.6 million shares, up slightly from the beginning of April. Eagle is run by Boykin Curry IV, the son of the fund’s founder. Find more of Eagle’s favorite stocks from the end of the second quarter. Jason Capello’s Merchants’ Gate Capital cut its stake in Ecolab to 1.7 million shares, but it was still the fifth largest position in that fund’s 13F portfolio (research more of Merchants’ Gate’s top stocks). Cantillon Capital Management initiated a position of 1.5 million shares in the second quarter, putting about $100 million into the stock. Cantillon was founded in 2003 and is managed by William von Mueffling (see more stock picks from Cantillon Capital Management).
In the second quarter of the year, Ecolab’s revenue was up 74% from the same period in 2011. Costs of sales and SGA expenses rose as well, but margins only decreased slightly and the company was able to deliver a 47% increase in net income. However, Ecolab Inc. issued additional shares in the intervening period and so earnings per share only rose to 62 cents versus 53 cents – still an impressive increase of about 17%, but something that is important to note rather than focusing solely on raw earnings numbers. Over the first half of the year, EPS were actually down due to earnings only rising slightly compared to the first six months of 2011. This was partly due to restructuring charges and a large increase in interest expense, which in turn was partly due to a merger with Nalco Holding Company.
Looking ahead, the combined company trades at 18 times analyst estimates of its earnings for 2013. We would think that some of Ecolab’s extra costs should fall off as the integration of Nalco proceeds, and given the company’s performance in Q2 we should see some improvement in earnings per share. However, if the Street is right on the $3.52 per share figure for next year then the company is probably only about fairly valued at that multiple and we’d note that comes out to a quarterly average of 88 cents- significantly above what Ecolab Inc. did in the second quarter. Cautious investors should also note Ecolab’s beta of 0.6, suggesting that on a statistical basis its link to the broader market indices is limited.
Other cleaning products companies include Church & Dwight Co., Inc. (NYSE:CHD) and Stepan Company (NYSE:SCL). Church & Dwight is about even with the larger Ecolab from a valuation perspective, trading at a forward P/E multiple of 19. However, its business was about flat last quarter versus a year ago as revenue and earnings only changed by 3 to 4 percent. Its dividend yield of 1.8% means it is not worth committing to the stock on that basis either. Stepan, which manufactures chemicals that are in turn used as ingredients in cleaners, is cheaper at trailing and forward P/Es of 14 and 11, respectively. It too is seeing business about flat compared to 2011, but has a valuation advantage over Church & Dwight.
We would also compare Ecolab to Colgate-Palmolive Company (NYSE:CL) and The Procter & Gamble Company (NYSE:PG), which include cleaning products among their larger portfolio of personal products. These companies make for better defensive plays, with lower betas than Ecolab and dividend yields of 2.3% and 3.2% respectively. On an earnings basis Colgate-Palmolive matches Ecolab’s forward P/E and Procter & Gamble is actually cheaper at 16 times forward estimates. Given that these are larger companies, they would seem to be better buys unless an investor wants high exposure to cleaning products specifically.
