It is a beautiful thing when a CEO's vision for their company's future lines up with my investment thesis for its stock. This alignment of values seems to be the case for Ecolab (ECL -0.61%), the water, hygiene, and infection prevention services company.

President and CEO Christophe Beck summarized its aims during the Q2 earnings call: "Global trends in people health, like infection prevention and food safety; as well as planet health, like water and carbon emissions, are becoming front and center for every business leader -- and there's no one positioned to help customers on both fronts better than Ecolab." 

Mature adult washes their hands in a bright white sink basin.

Image source: Getty Images

Sourcing clean water, healthy food, and reliable energy safely will be significant hurdles facing the world as its population grows. Ecolab is off to a great start to meet these challenges. In 2020, it conserved over 200 billion gallons of water, prevented the creation of 3.5 metrics tonnes of CO2, provided 1.3 billion people with safe food, and cleaned 66 billion hands.

Simply put, I think the world needs the services of a company like Ecolab, so long as it remains the top dog in improving sustainability and eliminates a few current weaknesses. 

Quick SWOT Analysis

First things first, let's take a brief overview of the company's current operations by looking at the main strengths, weaknesses, opportunities, and threats for Ecolab.

  • Strengths: Dividend Aristocrat status, fortress-like financial metrics, 9% profit margins, and leadership position give Ecolab a rock-solid foundation for future growth. Thanks to this solid financial footing, the company is positioned beautifully to capture market share as it continues to navigate its way out of the pandemic.
  • Weaknesses: Revenue per share has only grown from $40 to $42 since 2012. While profitability and efficiencies, in general, have been maximized for the company, it needs to restart revenue growth to become a long-term investing success.
  • Opportunities: Ecolab saw a 53% increase in data center sales versus Q2 2019, highlighting how valuable trend sustainability may be to the "big tech" companies moving forward. This sales segment is still in its infancy and represents Ecolab's most significant catalyst for revenue growth.
  • Threats: While COVID-19 did, unfortunately, help highlight the importance of a variety of Ecolab's offerings, EPS was still down 30% in 2020 due to its impact. Investors need to see EPS normalize and expand again when we emerge from the pandemic.

Overall, Ecolab has the resources it needs to overcome the blows its taken to revenue. I think the future could hold good things for the company (and its shareholders), especially if it can capitalize on its massive market opportunity.

A few promising points on market opportunity

Delivering on its promise to help provide safe food, clean water, and healthy environments, Ecolab has positioned itself as the leader within its industry. However, the following two points show that growth is far from over, even though the company sits at a $63 billion market cap.

Ecolab is the true leader in its industry, posting four times the sales of its nearest peer. Despite this leadership position, it only has a 9% overall share of the $135 billion in annual sales.

Due to the highly fragmented industry, Ecolab could capture new sources of sales growth by simply expanding its market share. As one of the few global brands in its sector, Ecolab has the power of scale on its side versus its more localized peers. Furthermore, Ecolab can land significant contracts with some of the largest companies in the world, thanks to its size and ability to offer products that smaller companies cannot.

In addition to market share expansion, the overall market opportunity for Ecolab has grown by 9% annually over the last decade. The facts that environmental, social, and governance investing (ESG) is becoming an area of focus for more investors and Ecolab's core offerings are growing more critical over time suggest a bright future for its stock.

An investor's next move

As the industry leader in sustainability, Ecolab has positioned itself to grow its market share in new, adjacent categories, such as its data center, water management, or its life sciences segment. With its vision of a truly sustainable future, the company offers investors intriguing potential to beat the market.

As is often the case with great businesses, Ecolab trades at a premium valuation posting a price-to-earnings (P/E) ratio of 50 and a price-to-cash-flow (PCF) ratio of 33. Due to these temporarily inflated valuation figures, I believe it is more helpful to look at Ecolab through the lens of its $63 billion market cap versus its $135 billion annually (and growing) market opportunity.

Going forward, I will be holding management's feet to the fire as their long-term sales and EPS growth goals are 6% to 8% and 15%, respectively. Having grown revenue by 7% annually over the last decade, these goals are ambitious yet reasonable. But, perhaps most importantly, I will be watching to ensure Ecolab builds upon its current 9% market share in the coming quarters.