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Stock Screen: Stocks with Low Risk - December 28, 2012
Investors can usually find stocks with low risk or equities with strong expected relative price performance fairly easily. The challenge comes when you want to combine these two features, as the presence of one attribute often means that a stock lags in the other. In this screen, however, we seek to combine the best of both worlds, and search for issues that meet both of these criteria. To generate our list, we first required that all stocks possess top ranks for Safety and Timeliness (i.e. relative price performance in the year ahead), two of Value Line’s many proprietary ranks. Then, to further reduce the relative collective risk that is usually associated with stocks that offer high returns, we limited our cut to equities with a Price Stability Index (another one of Value Line’s proprietary measures) in the 90th percentile and above.
Not surprisingly, equities arising from this screen are largely considered defensive in nature, and our list (see below) is dominated by established and conservatively run companies, including Ecolab, Inc. (ECL).
Ecolab develops and markets cleaning products (for washing dishes, hotel/healthcare laundry, kitchen and quick service restaurant sanitizing), as well as pest elimination, maintenance, and repair services. The Food & Beverage Division provides cleaning systems, primarily to dairy plants, dairy farms, breweries, soft-drink bottling plants, and meat, poultry and other food processors. The Healthcare Division offers infection prevention and other related offerings (hand hygiene, hard surface disinfectants, instrument cleaners, etc.) to acute care hospitals, surgery centers, dental offices and veterinary clinics. Approximately 13 months ago, Ecolab completed a merger with Nalco Holdings, a leading supplier of chemicals and services used in water treatment, pollution control, energy conservation, oil production and refining, steelmaking, papermaking, mining, and other industrial processes. Typically, customers engage Nalco to achieve water and energy savings, maintenance and capital expenditure avoidance, as well as product quality and production enhancement improvements. The combined entity operates in 160 countries and enables necessities such as clean water, abundant energy and healthy environments. The diversified product and service offering allows Ecolab to sell the wares of several segments to individual customers.
Continuing with its shopping spree, Ecolab recently announced it will be acquiring privately held specialty chemical company Champion Technologies for $2.16 billion. Champion provides the chemicals used in drilling for natural gas, a market that is currently booming in the U.S. The deal should enhance Ecolab’s energy services business and add approximately $1.5 billion in sales, $0.12 to 2013 earnings per share, and $0.50 in earnings by 2016. The company continues to be in discussions with the Antitrust Division of the U.S. Department of Justice regarding its bid to acquire Champion. The deal was not approved by the end of the year as expected, so the DOJ’s review will likely continue for another few weeks (deadline is February 28, 2013).
Meanwhile, Ecolab is trying to get its operating margins in order. In the U.S., its profitability has fluctuated quarter to quarter over the past several years. It hopes to even this out with more product introductions and synergies arising from the Nalco and Champion acquisitions, i.e., closing some plants and deleting repetitive products. The difficult economic situation in Europe has caused lackluster volumes, which is taking a toll on ECL’s margins. Higher raw materials costs and supply chain inefficiencies have also contributed. Ecolab is working to offset this weakness by consolidating facilities and achieving procurement savings. Price hikes should also help dilute the higher raw goods costs. Still, Europe will likely remain a weak spot until the macro environment there improves. Management expects conditions to remain more or less the same there in 2013.
Although Ecolab has paid a dividend for 76 consecutive years and recently had its 21st consecutive annual dividend rate increase, the payment still only yields around 1.2%, well below the Value Line average of 2.3%. Nonetheless, Ecolab says dividends will be a priority in terms of cash usage in the coming years. It also aspires to pay down a chunk of the debt load it took on to acquire Nalco. Smaller, bolt-on acquisitions will also be a focus, as will share repurchases.
Overall, we think Ecolab shares are a solid choice for conservative investors. We expect growth to stem from emerging markets in need of water preservation and oil field services customers looking to augment production. For more information, please view our full page report found in The Value Line Investment Survey.
|Int'l Flavors & Frag.||IFF|
|McCormick & Co.||MKC|
|Nestle SA ADS||NSRGY|
|Tootsie Roll Ind.||TR|
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.