The beta on ECL is 0.95.
On October 27, Ecolab reported 3Q20 earnings that declined almost 25% year-over-year but topped analyst expectations. Organic sales declined 6% to $2.8 billion – an improvement from the 13% decline in 2Q.
The shares were down more than 4% following the 3Q earnings report.
This diversified company’s results were impacted by the pandemic. Some businesses reported a pick-up in demand, including the Healthcare and Life Sciences segment. However, adjusted earnings from continuing operations reflected COVID-19-related volume declines in areas such as hotels and restaurants, and negative operating leverage.
Management is no longer providing guidance. Along with its 1Q earnings release in April, management rescinded its outlook for 2020 due to COVID-19. The company had previously projected full-year adjusted diluted EPS (including the Upstream Energy segment, ChampionX, which has been spun off) of $6.33-$6.53, implying 9%-12% growth. In the 2Q release, CEO Douglas M. Baker commented that the second quarter was the ‘low point’ for Ecolab. He also said that end markets recovered through the second quarter and that the trend continued into July. The company expects a gradual, if uneven, recovery from 2Q levels through the second half of 2020. In the 3Q release, management said that it expects continued improvement in 4Q, but at a slower rate than in 3Q as the latest wave of the pandemic impacts business activity.
In 2Q, it spun off its Upstream Energy business – now rebranded as ChampionX – as an independent, publicly traded company in a tax-free reverse Morris Trust transaction.
EARNINGS & GROWTH ANALYSIS
Ecolab operates in four segments. Global Institutional (30%), which provides cleaning and sanitizing products and supplies; Global Healthcare and Life Sciences (11%), which provides healthcare cleaning solutions; and ‘Other.’
In the Global Industrial segment, sales declined 2% year-over-year in constant currency. This division includes the Food & Beverage, Water, Paper and Downstream units. During the quarter, the Food & Beverage business delivered the strongest sales growth. We expect continued solid performance from this segment over the next few quarters.
The Global Institutional segment saw sales fall 22% in constant currency. However, this was a sequential improvement from 2Q20, when the segment posted a loss. This division includes the Institutional and Specialty businesses. During the quarter, sales were led, once again, by Specialty, up 1%.
In the Global Healthcare and Life Sciences division, revenue rose 29% in constant currency, led by Life Sciences.
Sales in the ‘Other’ segment dropped 6% year-over-year on a constant-currency basis. The Other segment includes Pest Elimination, Textile Care, and Colloidal Technologies.
The adjusted operating margin had narrowed from 2Q18 through 1Q19, and management implemented a plan to deliver $325 million in SG&A savings by 2021. Though margins narrowed in 3Q20, the quarter included extraordinary COVID-19-related expenses, an unfavorable business mix, and reduced leverage.
FINANCIAL STRENGTH & DIVIDEND
Ecolab has paid a cash dividend for 83 consecutive years. In December 2019, the board increased the quarterly dividend by 2% to $0.47, or $1.88 annually.
MANAGEMENT & RISKS
Douglas M. Baker Jr. is Ecolab’s chairman and CEO. Mr. Baker previously held executive positions in marketing, sales, and general management both in the U.S. and Europe. He began his career at Ecolab in 1989 after working in brand management at Procter & Gamble. CFO Daniel J. Schmechel joined Ecolab in 1995, and previously held finance positions at Exxon and Amoco.
Investors in ECL shares face risks, including the risk that management will not be able to profitably integrate companies acquired through M&A.
Ecolab has 45,000 employees worldwide.
Since the pandemic, the trend has been neutral.