Ecolab Upgraded To Overweight Based On Poor Performance

JP Morgan has published a research report on Ecolab, Inc. ECL and has upgraded the company from Neutral to Overweight. In the report, JP Morgan writes "Ecolab stands out as one of the poorer performing equities among the 36 Chemical companies we regularly track, ranking 32nd out of 36 in 2010 stock performance. Ecolab has also underperformed the S&P averages, increasing 5.9% year-to-date from $44.58 to $47.22 versus a 9.7% increase in the S&P 500. Historically, Ecolab tends to trade at a premium to the higher quality companies in the industry such as Praxair. Praxair, currently, trades at an EV/EBITDA multiple of 10.1x for 2011E versus ECL at 9.2x. ECL's return on capital compares favorably to PX at 15% versus 13%, and its free cash flow yield is 5.4% versus 3.8% at PX. We believe that Ecolab's poor share price performance in 2010 is the result of its reliable 13% EPS growth being very much overshadowed by the faster earnings expansion rates of the more cyclical chemical companies in 2010. But Ecolab tends to be a company whose sales, volume, and earnings growth accelerate as an economic recovery extends itself. Accordingly, we think that at this juncture Ecolab's consistently strong earnings record, high returns on capital, and good free cash flow generation are insufficiently recognized, creating a purchase opportunity. Our December 2011 price target is $54 or 10.5x EBITDA, representing a 0.4 multiple point premium to Praxair's current valuation." JP Morgan has also raised the price target on Ecolab from $52 to $54. Ecolab closed yesterday at $47.22.