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Why Goldman Sachs Downgraded Ecolab to ‘Sell’

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Price movement 

Ecolab (ECL) has a market cap of $30.5 billion. It fell by 3.1%. It closed at $103.04 per share as of March 14, 2016. The price movement on a weekly, monthly, and YTD (year-to-date) basis is -2.4%, 0.08%, and -9.6%, respectively.

Currently, Ecolab is trading 2.2% below its 20-day moving average, 2.4% below its 50-day moving average, and 7.9% below its 200-day moving average.

The PowerShares Water Resource Portfolio (PHO) invests 7.6% of its holdings in Ecolab. PHO tracks a modified liquidity-weighted index of US-listed companies that create products to conserve and purify water. PHO’s YTD price movement was -2.0% as of March 11, 2016.

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

  • Danaher Corporation (DHR) – $62.9 billion
  • Rollins (ROL) – $6.0 billion
  • ServiceMaster Global Holdings (SERV) – $4.9 billion
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Goldman Sachs downgraded Ecolab

Goldman Sachs downgraded Ecolab’s rating from “neutral” to “sell.” It also reduced the price target to $93.0 from $104.0 per share.

Performance in fiscal 4Q15 and 2015

Ecolab reported fiscal 4Q15 net sales of $3,412.0 million—a fall of 7.3% compared to net sales of $3,680.8 million in fiscal 4Q14. The sales of the Global Industrial and Global Institutional segments rose by 4.1% and 5.4%, respectively, in fiscal 4Q15. The sales of the Global Energy segment fell by 13.6% in fiscal 4Q15—compared to fiscal 4Q14.

Its net income and EPS (earnings per share) fell to $208.9 million and $0.69, respectively, in fiscal 4Q15—compared to $335.5 million and $1.10, respectively, in fiscal 4Q14.

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Fiscal 2015 results

In fiscal 2015, Ecolab reported net sales of $13,545.1 million—a fall of 5.1% year-over-year. Its net income and EPS fell to $1,002.1 million and $3.32, respectively, in fiscal 2015, compared to $1,202.8 million and $3.93, respectively, in fiscal 2014.

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

Ecolab’s price-to-earnings and price-to-book value ratios are 30.9x and 4.4x, respectively, as of March 14, 2016.

Projections

The company made the following projections for fiscal 2016 and fiscal 1Q16:

Fiscal 2016

  • It expects mid-single-digit fixed currency sales growth in institutional, industrial, and other segments.
  • The adjusted gross margin, excluding special gains and charges, is expected to be 47%–48%.
  • It expects an adjusted tax rate of ~26%.
  • The non-controlling interest should be $0.06–$0.10.
  • The adjusted EPS, excluding special gains and charges, is expected to be $4.35–$4.55.

Fiscal 1Q16

  • The adjusted gross margin, excluding special gains and charges, is expected to be of ~47%.
  • The company anticipates an adjusted tax rate of ~26%.
  • The non-controlling interest is expected to be $0.01–$0.02.
  • The adjusted EPS, excluding special gains and charges, is expected to be $0.73–$0.80.
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