Ecolab (ECL), which develops and markets products and services for the hospitality, food service, healthcare and industrial markets in more than 170 countries, will possibly announce a higher dividend in the coming week.
The stock currently has a dividend yield of 0.9%, with quarterly payments of $0.23 per share. The company usually announces its dividend increase right at the start of December. This year the stock has easily outperformed the overall market with a gain of 49.5% year to date. This is definitely a great motive, along with other positive factors, to see a surge in the recommended options call.
Due to ECL’s strong operating results, the total return of Ecolab shares have far outpaced that of the S&P 500 over the past 20 years. Over that time, Ecolab’s total return has been nearly 1,800% versus the almost 300% total return of the S&P 500. This is due to a combination of organic revenue growth; investment in R&D and internal operations, and acquisitions — which has helped fuel the company’s impressive operating performance. Even though ECL has a high valuation it still offers an attractive return potential in the foreseeable future.
Technicals Set For Further Impetus
ECL has a 12-month high of $108.34 and a 12-month low of $69.26, which means that the stock is very likely to continue to trend upwards according to bullish technical indicators. The stock has support above $105.00.
The stock’s 50-day moving average is $102.62 and its 200-day moving average is $89.90 and has a market cap of $31.352 billion and a price-to-earnings ratio of 37.06.
Earnings Look Favorable
It is important to note that the earnings report by Ecolab on Tuesday, October 29 reported $1.04 EPS for the quarter, beating the Thomson Reuters consensus estimate of $1.03 by $0.01, which means that this company is providing a solid record of growth.
Ecolab has met or exceeded management’s EPS expectations in 85 of the last 86 quarters. ECL is targeting long-term EPS growth of 15 percent, which is conservative given the growth opportunities that lie ahead.
The company had revenue of $3.48 billion for the quarter, compared to the consensus estimate of $3.54 billion. During the same quarter last year, the company posted $0.87 earnings per share. Ecolab’s revenue was up 15.2% compared to the same quarter last year. On average, analysts predict that Ecolab Inc. will post $3.54 earnings per share for the current fiscal year.
About 90 percent of its sales are recurring, which provides earnings support during economic downturns, therefore stability is certainly a favorable factor for continued growth. As the largest player in highly fragmented industries, it has plenty of opportunities to grow its market share organically as well as through acquisitions.
Other Positive Factors Driving Ecolab
- Ecolab’s business model combines a heavy R&D focus and innovative products which confer low total ownership costs with a highly-trained, 25,000-person sales force who provide analytical/monitoring services to their customers.
- Ecolab has a high degree of recurring sales and is primarily a business-to-business services company.
- Capital expenditures have generally been moderate at about 5 percent of sales.
- The company has leadership positions in highly fragmented markets.
- The company’s biggest strength is in its ability to weather the economic downturn as it can focus on adding new customers, given its relatively low market share.
- Under stronger economic conditions, the company can pursue deeper penetration of existing customers, who, on average, purchase only about 50% of its product offerings and also provides higher incremental profit margins.
- The Nalco acquisition in December 2011 added leadership in addressing the need for clean water as well as chemicals and services to facilitate oil and gas production/processing.
- The energy capabilities have been further enhanced with the recent Champion acquisition.
- ECL has a consistent track record of strong earnings growth with current forward P/E multiple of 25.5 times which is about 20% above its 10-year average of 21.2 times.
Analysts Anticipate Continued Upward Momentum
A number of research firms have recently commented on ECL:
- Analysts at Jefferies Group raised their price target on shares of Ecolab from $115.00 to $123.00.
- Also, analysts at Zacks reiterated a neutral rating on shares of Ecolab. They now have a $105.00 price target on the stock.
- Finally, analysts at Canaccord Genuity raised their price target on shares of Ecolab from $110.00 to $120.00 and now have a buy rating on the stock.
Based on the past, it is expected that dividend investors will start accumulating ECL shares ahead of the expected dividend increase, and since this is a shortened trading week due to Thanksgiving, there should be an increase in buying interest. Last year the stock announced a higher dividend on December 6, but in the prior two years the news came at the start of the month, therefore this should push the stock price higher, providing for a good profit from the following call option.
Recommendation: Buy the ECL Jan 2014 110.000 call (ECL140118C00110000) at or under $1.40, good for the day. Place a protective stop limit at $0.55 and a pre-determined sell at $2.20.
As of this writing, Ian Harvey did not hold a position in any of the aforementioned securities. Visit his site, stock-options-made-easy.com, for a wealth of information that will help you benefit from the exciting and lucrative world of options trading.