Seth Goldstein: We've recently upgraded Ecolab to a wide moat rating from narrow as we think the company's switching-cost moat source has strengthened.
Ecolab is the largest supplier of cleaning and sanitation products in the world. The company's razor-and-blade business model creates customer switching costs as Ecolab's cleaning equipment requires customers to purchase the firm's proprietary consumables.
In addition to a continual emphasis on reducing its customers' water, energy, and labor expenses, Ecolab now offers equipment that will automatically keep regulatory compliance records. This regulatory aspect strengthens Ecolab's moat as customers would face increased compliance costs by choosing a competitor. Further, Ecolab focuses on cross-selling products, which also contributes to switching costs. For a customer with cleaning and sanitation needs, managing each order from a separate supplier has a fixed-cost component. Through the scope of its products, Ecolab serves as a one-stop shop, which saves its customers time and money aggregating orders and re-orders by engaging solely with Ecolab.
Although Ecolab's stock currently trades above our $141 per share fair value estimate, the company's strong competitive advantage should lead Ecolab to generate returns above its cost of capital for years to come.