start to the week

Back from the beach now and ready to start the week. Had a good day on Friday with nice gains in several stocks.

My plan is to trim some winners and potentially buy ECL this week. I had dinner with someone in the pest control business this weekend who also used to help manage a bar/restaurant. He was familiar with ecolab basically saying the core business of cleaning supplies is pretty good but its clear their other stuff like pest control is just an add on service -- as in "since we are already helping you with cleaning, why don't you sign up for our pest control service -- we can do it cheaper" but they are not specialists so if you have problems, ecolab is probably not going to be able to fix them. This all makes sense -- just like Google is best at search and Microsoft is best at Windows/Office; Ecolab is best at its original core business. That core is still growing and the other businesses add incremental cash flows with little incremental investment.

The risk is Patterson Dental -- they were a phenomenally successful company that sold equipment and other stuff to dentists for a long time. Fantastic record of consistent growth with most of it organic and some acquisitions helping. At some point they ran out of growth in their core business and the add on business' couldn't support the high multiple the stock had -- it declined sharply. Return on capital had declined because the other businesses were not as profitable. Patterson was stuck in a no win situation -- their core was a great business but they couldn't put new cpaital to work in the core and continue to earn high returns. That meant either giving the money back to shareholders or diluting the returns. they chose to dilute. I need to do some double checking on ECL to make sure this isn't occuring here but I don't think its an issue. International has been the problem because they are not growing as fast and they have lower margins. US continues to do well.

But one note of caution is why did their largest cleaning competitor in the US get out last year? Cleaning is a scale business (size matters) so that may explain it -- Ecolab definitely has scale. Perhaps the business is not as good as people think -- perhaps the competitor left because they knew the future stinks and so does ECL, they are just good at hiding it in these new businesses. I don't think that's true but some more digging couldn't hurt.

Last week I mentioned that Ecolab's international business should be much larger than its US business -- we have only 5% of the population and 25% of GDP so the rest of the world is 95% of the people and 75% of the GDP. True but labor conditions overseas are different -- they can throw bodies at cleaning problems without regard to cost because labor is practically free. Emerging markets also still cook at home mostly but rising incomes are increasing the amount of food eaten out. This is a long term trend -- increased consumer spending by Asians -- they won't just save money in the future.

Basically, when I look at a few good businesses in areas that I don't already own, I see most of them have done well recently but Ecolab has not. Praxair has done well; Sigma Aldrich has done well; etc. Ecolab beats them all longer term but over the last few years, Ecolab has not. Then its a matter of why? either the growth story is over -- which doesn't make sense so far given the record numbers they have put up. Or its due to something temporary like poor management in Europe. They have taken a lot of actions in europe to get growth and margins up -- I'm fairly confident this is a good chance to buy in when there are doubts about the growth story -- that's the time to do it because the price is good.

Secular drivers -- growth in travel (hotel cleaning, laundry), increase in eating out, focus on food safety; etc.