Has Ecolab Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Ecolab (NYSE: ECL  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Ecolab.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 10% Fail
  1-Year Revenue Growth > 12% 31% Pass
Margins Gross Margin > 35% 47.7% Pass
  Net Margin > 15% 5.2% Fail
Balance Sheet Debt to Equity < 50% 107.8% Fail
  Current Ratio > 1.3 1.13 Fail
Opportunities Return on Equity > 15% 10.3% Fail
Valuation Normalized P/E < 20 29.80 Fail
Dividends Current Yield > 2% 1.3% Fail
  5-Year Dividend Growth > 10% 11.8% Pass
       
  Total Score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Ecolab last year, the company has kept its three-point score. Revenue growth has soared, but those gains have come at the expense of profit margins and return on equity. Yet the stock is up nearly 20% over the past year.

Ecolab has a comfortable niche in the commercial cleaning and sanitation product industry. With a global presence that includes both the U.S. and dozens of countries around the world, the company is on the ground floor of a huge opportunity in a growing world.

Ecolab's acquisition of Nalco Holdings last year greatly expanded the water quality side of its business, taking it beyond water filtration to include water treatment and pollution control, along with energy conservation. As Ecolab looks to go up against established world players Veolia Environnement (NYSE: VE  ) and Danaher (NYSE: DHR  ) in areas like India, there's definitely no shortage of places that need the company's services. That suggests that Ecolab, Danaher, and Veolia could all end up winners as the overall pie gets bigger.

All that said, Ecolab faces its own competitive pressures. Although Swisher Hygiene (Nasdaq: SWSH  ) is relatively small, it's been growing quickly and could eventually threaten to poach some of Ecolab's U.S. commercial clients. And in its pest control segment, Ecolab has to deal with the constant presence of rival Rollins (NYSE: ROL  ) and its Orkin brand.

For Ecolab to improve, it needs to get its earnings growth back on track and get its valuation down to more reasonable levels. A boost in dividend yield might follow. If shares pull back a bit, then Ecolab could easily look a lot more like a perfect stock in the near future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Ecolab isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Ecolab to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Veolia Environnement. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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