Ecolab (NYSE:ECL) is a very attractive company, and it's also one of the very few that's set to be a net long-term beneficiary of the COVID-19 pandemic. After all, the company is the global leader in water safety, hygiene, and infection prevention solutions, and there's little problem raising awareness of those issues right now. Let's take a closer look at the company and assess the investment proposition.

Ecolab's strong growth rate

Ecolab recently completed the separation of its upstream energy business, ChampionX, and is now free to focus on its core aim. Specifically, management is looking to take advantage of a growth opportunity in its key health and safety markets.

A person in coveralls, mask, and hood near food equipment machinery.

Ecolab keeps food equipment clean. Image source: Getty Images.

A track record of growing earnings at an 11% compound annual growth rate over the last 20 years might suggest Ecolab is a company about to mature into a low-growth cash cow, but the reality is far from that. In fact, management has ambitious targets of reaching a 20% operating income margin, with a return on invested capital (ROIC) of 20%, and earnings-per-share (EPS) growth of 15%.

Improving the operating income margin while generating mid-single-digit revenue growth would indeed help to significantly boost earnings growth. In addition, improving ROIC would generate and free up more capital that could be invested in growth.

ECL Return on Invested Capital Chart

Data by YCharts

Can Ecolab hit its targets?

Of course, targets are one thing, but their viability is another. Management's key argument is that Ecolab is the market leader operating within attractive long-term growth markets -- food hygiene, clean water, and environmental health and safety. However, given that it's a highly fragmented marketplace, Ecolab's market share is only 10%. As such, Ecolab can both grow as its market does and through grabbing market share from smaller competitors.

Moreover, the diversity of its customers -- no one customer contributes more than 2% of its sales, and the top 10 only generate 10% of sales -- suggests that Ecolab can achieve its aim of building share with its largest players. Indeed, as its customers -- Coca-Cola, McDonald's, Unilever, Nestle, etc. -- expand around the globe, it's likely that Ecolab will grow with them.

Add in underlying demand from growth in environmental and regulatory requirements in Ecolab's served industries, and it's not hard to see the company's potential for growth. Throw in the increased emphasis on hygiene that will result as a consequence of the pandemic, and Ecolab's long-term growth looks promising.

Near-term prospects

There's clearly a very strong case for buying the Dividend Aristocrat stock as a core holding in a long-term portfolio, but what about the potential for some near-term volatility? In other words, does the company face some near-term risk that might create a better entry point into the stock?

It's a good question because the stock price has risen since it looked like a good stock to buy in April. Furthermore, the stock's current valuations do appear to have a lot of the company's long-term prospects already priced into them.

ECL Price to Free Cash Flow Chart

Data by YCharts

However, Ecolab does have some near-term risk, because it counts the hospitality and lodging industries as key customer markets. It's no secret that hotels, restaurants, and the leisure industry are likely to be some of the last to recover from the COVID-19 pandemic. Indeed, on the company's latest corporate overview, management outlined that 31% of its end markets (including full-service restaurants, lodging, and leisure) are seeing "demand depressed," with a further 13% (refineries, chemicals, and education) seeing "demand down." In other words, 44% of Ecolab's revenue is under near-term pressure.

On a more positive note, around a third of its revenue by end market (food and beverage, healthcare, food retail, and life sciences) is characterized as "demand plus."

Is Ecolab a buy?

Putting it all together, Ecolab still looks like a company with excellent long-term prospects, but on a near-term basis its upside looks limited due to its valuation. Meanwhile, the possibility of some earnings disappointment due to its exposure to some challenged end markets means it has downside potential. As such, cautious investors may well want to wait for a better entry point.