Few stocks escaped the marketwide sell-off in October -- not even blue chip conglomerate Ecolab (ECL +0.43%). Following the release of third-quarter 2018 earnings results and management's forecast for persistent headwinds as the business enters the final months of the year, investors might be wondering what to expect in the short term. Is the stock's 6% sell-off in the last month indicative of what's ahead?
Maybe not, according to Ecolab CEO Douglas Baker, Jr., who said it's all a matter of timing. Baker told investors in the press release that the business is strong and that competitive advantages remain in place, but there just aren't enough days left in 2018 to offset stubborn inflationary pressures in raw material and transportation costs. That sets the stage for continued growth in 2019, with the energy segment an important potential source. Here's what investors need to know.
Image source: Getty Images.
By the numbers
The biggest takeaway for Wall Street from Ecolab's third-quarter 2018 earnings release was that the company reduced full-year 2018 guidance (more on that below) with just one quarter to go. The biggest takeaway for shareholders is that the business is executing despite higher-than-expected costs driven by short-term factors primarily out of the company's control.
Consider that Ecolab's three reportable business segments -- energy, industrial, and institutional -- all experienced revenue and operating income growth in the third quarter of 2018 compared to the year-ago period.
| Metric | Q3 2018 | Q3 2017 | Year-Over-Year Change |
|---|---|---|---|
|
Global energy revenue |
$862 million |
$806 million |
7% |
|
Global industrial revenue |
$1.35 billion |
$1.27 billion |
6% |
|
Global institutional revenue |
$1.31 billion |
$1.24 billion |
5% |
|
Global energy operating income |
$89 million |
$87 million |
2% |
|
Global industrial operating income |
$214 million |
$211 million |
1% |
|
Global institutional operating income |
$286 million |
$272 million |
5% |
|
Corporate operating income |
($121 million) |
($47 million) |
N/A |
DATA SOURCE: ECOLAB. NOTE: ALL NUMBERS ARE REPORTED IN PUBLIC CURRENCY RATES AND ARE NOT ADJUSTED.
The energy segment has continued to improve along with the global industry in recent years. While crude oil prices have encountered a bit more volatility in recent months on geopolitical and other concerns, production growth -- especially in the United States -- has provided a boost to both Ecolab's upstream business (helping wells maximize output and financial returns) and downstream business (aiding logistics for petrochemical manufacturers). The year-over-year operating income growth was actually even better than presented (low double digits) once investors exclude a favorable legal settlement from 2017.
Looking ahead, there could be a significant growth opportunity in American energy. The country reported a record 8,389 oil and gas wells that had been drilled but uncompleted as of September. Producers are waiting for infrastructure issues such as pipeline bottlenecks to be solved in the coming quarters and years before bringing them online. If that occurs, then Ecolab could be poised to capitalize.
Meanwhile, Ecolab's industrial and institutional segments are delivering slow and steady growth on the heels of growing demand for water and hygiene solutions in pulp and paper production, food manufacturing, and healthcare. The biggest weight on the business' performance in the third quarter of 2018 came from rising corporate expenses, primarily from $79 million in special charges related to rolling out operational efficiency improvements. That alone was enough to result in a decrease in total operating income between the comparison periods.
| Metric | Q3 2018 | Q3 2017 | Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$3.75 billion |
$3.56 billion |
5% |
|
Operating income |
$516 million |
$564 million |
(8%) |
|
Net income |
$435 million |
$393 million |
11% |
|
Diluted EPS |
$1.48 |
$1.34 |
11% |
DATA SOURCE: ECOLAB. NOTE: ALL NUMBERS ARE REPORTED IN PUBLIC CURRENCY RATES AND ARE NOT ADJUSTED.
That solid, slow, and steady growth is what investors have come to expect from Ecolab. Although for 2018, they'll have to expect a little bit less than previously told.
Management lowered its full-year 2018 earnings guidance from the previous range of $5.30 to $5.50 in adjusted EPS to a new range of $5.20 to $5.30. While that represents growth of 11% to 13% from 2017, the average estimate on Wall Street called for $5.36 for the year -- 2% higher than the new midpoint.
The reason is that raw material and transportation expenses have risen more than expected this year. In fact, the expenses were $0.75 per share higher than originally forecast at the beginning of the year, and are expected to be $0.15 per share higher than forecast at the last quarterly earnings discussion in August. While that has blemished an otherwise strong year, management is confident that the business is poised to overcome these headwinds in 2019 and beyond. Considering that the business has grown this year despite the higher-than-expected costs, investors might have confidence that Ecolab's pricing and operating efficiency advantages can continue to outpace these inflationary pressures.
Can Ecolab finish 2018 strong?
Shares of this blue chip conglomerate have fallen 6% in the last month, but are still up 9% on the year and 10% when dividend payments are included. That compares favorably to the 1% total return (index performance plus dividends) of the S&P 500 since the beginning of 2018. If volatility lingers for the broader stock market, then investors might expect that divergence to continue, considering that Ecolab's core business offerings are staples for industrial and institutional customers. And if American energy production growth can continue for the foreseeable future -- and Ecolab capitalizes on it -- then shareholders with a long-term mind-set could be rewarded.
