What happened
Shares of Ecolab (ECL +0.94%) gained 34% in the first six months of 2019, according to data provided by S&P Global Market Intelligence. The hygiene and cleaning solutions conglomerate delivered solid full-year 2018 and first-quarter 2019 operating results, announced its intention to spin off the bulk of its suffering energy segment, and remains confident in its global portfolio.
The first-half performance marks a rapid acceleration from the 9.8% gain shares delivered in 2018. It shows that Wall Street and investors have growing confidence in Ecolab's operating efficiency initiatives and see the business as a safe-haven investment as economic anxieties begin to creep up.
Image source: Getty Images.
So what
The slow-growing conglomerate reported relatively strong Q1 2019 operating results. Compared to the year-ago period, revenue grew just 1%, but operating income increased 4%. The latter was driven primarily by the company's operating efficiency program, which includes a new resource-planning software system that was first rolled out in 2018.
The improvement in operating income may not seem like much, but it gave investors confidence that Ecolab is on track to reduce total operating expenses by its stated target of $325 million per year. Achieving that would result in a 17% increase in operating income from 2018.
Ecolab also received a big boost from reduced tax expense in Q1 2019, which is something that's unlikely to be sustainable in the long run. Of course, tax expense is counted after operating income is tallied on the income statement, so the benefit boosted net income and earnings per share (EPS).
That's why investors might find operating income a better gauge of the company's efficiency -- and the cost management program isn't the only tailwind. Earlier this year, Ecolab announced its intention to spin off its upstream energy business. Considering it represented 16% of total revenue in 2018 and sported an operating margin of just 7%, compared to 14.5% for the rest of the business, jettisoning the unit will boost operating margin for the conglomerate.
Now what
Ecolab remains on a promising trajectory thanks to management's focus on controlling the factors within reach. It will take years for the cost management program to be fully realized, but investors have to be optimistic with the strong start. Whether or not that's enough to plow through broader economic headwinds, it seems the stable business will continue to be a safe haven for investors. More information will be available once Q2 2019 operating results are announced in the coming weeks.
