"Do not wait until you are thirsty to build a well." – Japanese proverb
In terms of the availability of scarce resources, not all areas of the globe are created equally. Natural gas, oil, and water are resources wildly scattered about Mother Earth, and not always in the fairest of ways. Given that these resources are limited in supply, both lengthening their lifespans and increasing their accessibility are likely to grow in importance because many projections saddle the globe with a population approaching 9 billion by 2050. This 30% increase represents nearly 2 billion more mouths to feed, 4 billion more hands to wash and, judging by the myriad estimates, an unpredictably greater amount of energy to provide.
Human rights are not always a given
Just shy of three years ago, water and sanitation became a human right bestowed upon us all by the UN Human Rights Council. Unfortunately, a report in 2012 from the International Food Policy Research Institute calculated that a too large portion – 36% – of the world's population still lives in an area of water scarcity. This paints a bleak picture given that most of these areas are among the world's poorest and are predicted to contribute the most to our increased population base. Adding to this saddening thought is the fact that greater than 2.7 million people die each year due to lack of sanitation. These areas which I am describing include China, India, the Middle East, and northern Africa.
More than just mouths to feed
Aside from the troubling picture surrounding the availability of water, these countries share another thing in common: all are expected to factor heavily in global hydrocarbon consumption and production. Vast amounts of oil and natural gas have either already been pumped out of these regions or the regions have been documented as the next big targets of the oil and gas industry. Unfortunately, extracting said resources is a very water-intensive activity. Without deriving a way to reduce the amount of water used through recycling or the involvement of chemicals, it might boil down to a trade-off between either providing drinking water or energy needs to the general public.
The all-important crossroads
Finding itself at the intersection of both of these problems, Ecolab (NYSE: ECL ) presents an interesting investment opportunity given its wide portfolio of products and services, the bulk of which are aimed at both sanitation and managing water use. As the developing world continues to find itself in a wealthier position than it held in the not so distant past, Ecolab's ability to help it catch up with OECD countries in terms of sanitation and water use management bodes well for investors.
The company has shown past success in growing within these developing markets, which I view as key targets for the future. In 2012, its "International Cleaning, Sanitizing & Other Services" segment accounted for 27% of revenue while "Global Water" contributed 18%. Africa and the Middle East have both factored heavily in this success. While growth in these two segments is likely, I see Ecolab growing in these geographies for other reasons as well.
Taking a different direction at the intersection sets you on the path to the "Global Energy" division that contributed 19% to 2012 revenues. Expect that 19% to be a much higher share in 2013. Why? Because management clearly believes, like I do, in global energy growth, exhibited by the closing of its acquisition of Champion in April of this year. In my mind, this purchase (at just 1.77 times 2012 revenue) makes perfect sense.
The newly combined subsidiary of Nalco-Champion is now an energy industry leader in sustainable solutions and specialty chemical products, from the upstream right through to the petrochemical process. By making energy production more sustainable, operations such as Nalco-Champion's could help spur development in countries whose water supplies don't match up with those in more liquid parts of the world.
Sealing the deal
The past year has been very kind to Ecolab shareholders, given that shares have nearly doubled the return of the S&P 500 over that time frame. This has left the company priced at a premium to its closest peers – 33 times trailing-12-month earnings. Despite this, I am confident that growth opportunities for this company warrant the multiple.
Already, the Champion acquisition is exceeding expectations, signs of Europe emerging from its recession are coming to light, and revenue from Asia and Latin America is beginning to represent a bigger piece of the overall pie for Ecolab. Don't take this as a sign of domestic or European weakness either. All five geographic regions which it reports have shown flat or positive sales growth over the past three years.
In summation, by adding Ecolab to my Motley Fool Real-Money portfolio, I am gaining access to growing global trends, sound fundamentals, and a management team clearly capable of growing organically or through mergers and acquisitions. Check back in on the company's progress or add it to your watchlist to follow along.
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