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Why Barclays Reduced Ecolab’s Price Target

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Price movement of Ecolab

Ecolab (ECL) has a market cap of $30.2 billion. ECL rose by 2.0% to close at $102.13 per share as of February 24, 2016. The price movement on a weekly, monthly, and year-to-date (or YTD) basis is -7.1%, -1.1%, and -10.7%, respectively.

Technically, the stock has broken the support and is trading below all moving day averages. Currently, ECL is trading 3.8% below its 20-day moving average, 5.9% below its 50-day moving average, and 9.5% below its 200-day moving average.

The PowerShares Water Resource Portfolio (PHO) invests 7.6% of its holdings in Ecolab. The ETF tracks a modified liquidity-weighted index of US-listed companies that create products to conserve and purify water. The YTD price movement of PHO was -6.9% as of February 23, 2016.

The market caps of Ecolab’s competitors are as follows:

  • Danaher (DHR): $59.8 billion
  • Rollins (ROL): $6.0 billion
  • ServiceMaster Global Holdings (SERV): $5.4 billion
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Barclays reduced its Ecolab price target

Barclays has reduced its Ecolab price target to $120 from $130 per share and maintained its “overweight” rating on the stock due to the drop in performance in fiscal 4Q15.

Ecolab’s performance in 4Q15 and 2015

Ecolab reported 4Q15 net sales of about $3.4 billion, a fall of 7.3% compared to net sales of about $3.7 billion in 4Q14. Sales from the Global Industrial and Global Institutional segments rose by 4.1% and 5.4%, respectively, in 4Q15. Sales for the Global Energy segment fell by 13.6% in 4Q15 over 4Q14.

The company’s net income and EPS (earnings per share) fell to $208.9 million and $0.69, respectively, in 4Q15, compared to $335.5 million and $1.10, respectively, in 4Q14.

Ecolab de-consolidated its Venezuela operations at the end of the fourth quarter. It will stop consolidating the results of its operations in its 1Q16 income statement, which should affect the local operations of its Venezuelan businesses.

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2015 results

In 2015, ECL reported net sales of about $13.5 billion, a fall of 5.1% YoY (year-over-year). The company reported special gains and charges of $414.8 million in 2015 compared to $68.8 million in 2014. Its net income and EPS fell to nearly $1 billion and $3.32, respectively, in 2015, compared to $1.2 billion and $3.93, respectively, in 2014.

Meanwhile, its cash and cash equivalents and inventories fell by 55.7% and 5.4%, respectively, in 2015. Its current ratio fell to 0.93x and its debt-to-equity ratio rose to 1.7x in 2015 compared to a current ratio and a debt-to-equity ratio of 1.1x and 1.6x, respectively, in 2014.

The price-to-earnings and price-to-book value ratios of Ecolab are 27.4x and 4.4x, respectively, as of February 24, 2016.

Projections

The company has made the following projections for fiscal 2016:

  • mid-single-digit fixed currency sales growth in institutional, industrial, and other segments
  • adjusted gross margin excluding special gains and charges in the range of 47%–48%
  • adjusted tax rate of ~26%
  • non-controlling interest in the range of $0.06–$0.10
  • adjusted EPS excluding special gains and charges in the range of $4.35–$4.55

The company has made the following projections for fiscal 1Q16:

  • adjusted gross margin excluding special gains and charges of ~47%
  • adjusted tax rate of ~26%
  • non-controlling interest in the range of $0.01–$0.02
  • adjusted EPS excluding special gains and charges in the range of $0.73–$0.80

Now let’s take a look at Leggett & Platt.

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