Why Ecolab Stock Is Sinking Today

Key Points

• Ecolab's earnings were solid, but fell short of expectations.

• With its shares priced near perfection, the miss was enough to send its stock price down.

• Ecolab's water cooling and circular water solutions offer intriguing growth potential, but the company may be more of a steady-Eddie investment than a showstopper.

• 10 stocks we like better than Ecolab ›

Shares of leading sustainability juggernaut Ecolab (NYSE: ECL) were down 4% at 11 a.m. ET on Tuesday, according to data provided by S&P Global Market Intelligence.

Ecolab reported second-quarter earnings that fell just shy of analysts' expectations, with earnings per share (EPS) just $0.01 short.

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However, the market's reaction to this miss may have more to do with Ecolab's lofty valuation of 35 times earnings, especially with minimal sales growth at the moment.

Can Ecolab live up to its valuation?

Ecolab is a leading provider of water management, sanitation, and pest elimination solutions for millions of locations across the globe. The company's offerings range from water cooling at data centers and circular water solutions at electronics manufacturers to infection prevention at hospitals and sanitation and pest control at hotels and restaurant chains.

Thanks to these mission-critical applications and the company's importance to its customers, Ecolab is a no-brainer business that aces the "snap test."

Image source: Getty Images.

However, the company has traded at an average price-to-earnings (P/E) ratio of 43 over the last five years, and it has underperformed versus the S&P 500 along the way.

Today, Ecolab's earnings were fine. But its stock is priced for near perfection, prompting the move downward.

While Ecolab has a lot to live up to with its valuation, its guidance for 12% to 15% adjusted EPS growth in 2025 is encouraging. Furthermore, the company saw double-digit sales growth from its burgeoning water cooling and circular water solutions for its high-tech customers.

Ultimately, Ecolab should be an excellent stock for investors seeking stability over the next decade. However, investors desiring multibagger returns may want to look elsewhere, as Ecolab is priced more like a growth stock, though it has grown EPS by only 4% annually over the last decade.

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Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool recommends Ecolab. The Motley Fool has a disclosure policy.