Often, the best-performing stocks are those in seemingly uninteresting industries. I'll take a well-managed market leader in a boring sector over a mediocre company in an overhyped sector any day. In the arena of cleaning, sanitizing, food safety, and infection-control products and services, one company fits this bill perfectly.
Ecolab (NYSE: ECL ) develops and markets services to the food-service, energy, health-care, industrial, and hospitality markets in more than 160 countries. The St. Paul, Minn.-based company is the global leader in a diverse array of products and services ranging from food safety and industrial cleaning to pest elimination and infection control. It's an important and highly global $57 billion industry, of which Ecolab commands a 10% market share. While its line of work may sound boring, foodborne illnesses and hospital-based infections are certainly no yawning matter.
According to the FDA, foodborne illness outbreaks are on the rise, with an increasing number attributed to imported foods. Each year, tainted food causes 325,000 hospitalizations and 5,000 deaths. And hospital-acquired infections are the fourth leading cause of deaths in the U.S., resulting in 100,000 deaths per year and costing more than $33 billion annually. These are worrying trends with far-reaching consequences.
To combat these issues, Ecolab is working hard at providing hospitals with comprehensive, industry-leading solutions to decrease the risk of infections. And its SANOVA program -- commended by Food Safety Magazine -- has delivered strong results in consistently and drastically reducing E. coli and Salmonella counts in a number of food-processing environments.
Profitable AND ethical -- a winning combo
Along with an important social purpose, the company has an impressive sales record. Net sales rose 17% to a record $1.85 billion in the fourth quarter of 2011, the ninth year of double-digit, adjusted-sales growth out of the last 10 years. However, margins contracted across the board and net income fell 32%, hit by charges related to the $8 billion acquisition of water treatment company Nalco Holding. Still, the company's gross profit margins have consistently been higher than similar consumer-oriented companies such as Church & Dwight (NYSE: CHD ) and Clorox (NYSE: CLX ) . Despite constant concerns regarding the effect of Ecolab's several acquisitions over the years, the company continues to deliver.
To penetrate more effectively the quick-service restaurant market, Ecolab acquired Kay Chemical, a leading supplier of cleaning and sanitizing products for fast-food powerhouses such as McDonald's (NYSE: MCD ) , for whom it has since developed several customized cleaning products. The company's acquisition of O.R. Solutions, a leading developer of surgical fluid warming and cooling systems, boosted fourth-quarter health-care sales by 35%. And investors who were apprehensive about the Nalco merger back in December can now breathe a collective sigh of relief, as Nalco's Q4 sales rose 13% and first-quarter trends suggest that operating income is improving sharply over last year's. Through smart acquisitions like these, Ecolab continues to make valuable investments in key growth businesses and positions itself better for additional high-growth markets.
Beside a solid performance record, the company also boasts a spotless ethical record. Last week, the Ethisphere Institute, a leading international think-tank dedicated to the advancement of corporate ethics and social responsibility, recognized Ecolab as one of the world's most ethical companies. This makes it the sixth consecutive year Ecolab has received this honor. The company has also consistently placed in Corporate Responsibility Magazine's list of "100 Best Corporate Citizens" list for nine years in a row. If you buy the argument that corporations are people, Ecolab would be a friendly neighbor who shovels your driveway and waters your plants while you're out of town.
Who's scooping up the shares?
Ecolab insiders seem to share Ethisphere's and Corporate Responsibility Magazine's high opinions of their company. In the past six months or so, board members and upper management were net buyers of Ecolab shares. Company insiders purchased nearly 7 million shares, representing more than 3% of the company's $210 million share float, a strong indicator that management is bullish about the company's prospects.
One of Ecolab's largest shareholders is Bill Gates of Microsoft fame. A longtime shareholder, Gates upped his ante in August of last year by purchasing an additional 3.9 million shares through his investment management firm, Cascade Investment. The tech tycoon is now the largest shareholder if you combine his investments in the company through Cascade and through the Bill & Melinda Gates Foundation. Gates' investment advisor Michael Larson, who also serves as Cascade's business manager, was recently appointed to Ecolab's Board of Directors. Looks like Gates and company are going all-in.
While I admit that the company faces headwinds in the form of rising raw material costs, I like the fact that it continues to expand into emerging high-growth markets, while remaining an ethical oasis in a desert of corporate corruption. For investors seeking some steady cash, the company recently declared a regular quarterly cash dividend of $0.20 per share. For 2012, Ecolab projects another year of double-digit sales growth in the range of 16%-20%. Trading toward the higher end of its 52-week range and at a P/E of around 31, the stock isn't exactly cheap. But I think a company as well-managed and well-positioned as Ecolab commands a premium and presents a solid long-term investment opportunity. If you're interested in other American companies capitalizing on emerging market growth, check out this free report.