This Is A Buffett Investment if I've Ever Seen One

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It's getting tougher and tougher to find solid investments. Thanks to a seemingly new global debt crisis every day, it feels like it's easier finding a needle in a haystack! But I do believe I've found an investment of which even Warren Buffett would approve, one that I believe will continue to clean up for some time to come.

The company
Ecolab (NYS: ECL) is the market leader in a very large and diverse line of work. Simply put, the company develops and markets products and services for the hospitality, food-service, health-care, and industrial markets the world over. From cleaning and sanitizing products and programs, to pest elimination, and maintenance and repair services, Ecolab is the vendor of choice for lines of work as varied as commercial food service chains like McDonalds (NYS: MCD) , schools, governments, military, and even correctional facilities.

What's so great about it anyway?
Razors and blades: Ecolab gets its equipment (the razors) into the hands of its customers and then just keep on selling the consumable cleaners and solutions (the blades), which incidentally are mostly only compatible with its own equipment. In fact, 90% of Ecolab's revenues are recurring in nature, and I'm a big fan of recurring revenue.

Ecolab has about 10% market share of a $57 billion global market and has nearly a three times advantage over its next largest competitor. As CEO Douglas Baker put it in a recent investor day conference: "Our ultimate advantage and the ultimate barrier to competition is our sales and service capabilities." That's not only an effect, but also a cause of its formidable scale.

: Ecolab is in the process of wrapping up its $5.4 billion acquisition of Nalco (NYS: NLC) , which will add considerable scale to its already large global presence. This acquisition will open up Ecolab to Nalco's 30% share of the $6 billion global water services market, as well as additional exposure to the paper and energy services -- representing an additional $2.5 billion market opportunity. If the company can integrate this acquisition nicely, it should open the floodgates up for some additional top-line growth.

Mucking up the waters
Of course, plenty of things could dirty this investment up. Here are a few things to look out for:

Just as the Nalco deal is a potential value creator, if it fails to go off without a hitch or if problems arise, there could be real trouble. Ecolab has made a number of smaller acquisitions, but nothing of this magnitude. While the acquisition will add some debt, management will be able to refinance everything at much better rates, and with the amount of free cash flow this company generates each and every year, I don't expect any issues.

Raw materials costs are always going to be a concern. Most materials like alkalis, acids, phosphorous materials, silicates and salts, and organic chemicals are purchased on an annual contract basis from a diverse group of chemical manufacturers. Any big jumps in costs or squeeze from suppliers could hit margins.

It's an advantage that that switching costs get higher as customers stay with Ecolab longer, but sometimes this can lead companies down the dark and winding road of complacency. Management must constantly strive for this to not happen, as the effects can be irreversible. Like Buffett says, "It takes 20 years to build a reputation and five minutes to ruin it."

Is the price right?
Let's be perfectly clear: I don't think Ecolab is a "screamingly cheap" buy today. But I also don't think it's terribly expensive, either. The bottom line is that sometimes quality companies demand a premium, and I think that's what we've got here. The stock trades today for 26 times trailing earnings and 11 EV/EBITDA, right in line with historical averages. But we're talking about a company that generates a ton of free cash flow year after year, too. And in looking at a discounted cash flow model and adjusting the numbers to account for the acquisition, today's price looks actually quite reasonable for a stock that has paid a dividend for 74 consecutive years and spent the first decade of the millennium whipping the market by more than 135 percentage points. It may not light the world on fire, but I can see this stock doubling over the course of the next five years, which would make me a happy camper.

I'm ready to clean up on this one
I've been looking for a company that can weather the storm of market volatility. And thanks to some tips here and there from the Oracle of Omaha, I think I've found it in Ecolab. It's a market leader with recurring revenue, excellent returns on equity and a formidable moat in it scale; I'm giving it a 6% ($1,000) position in my Rising Star portfolio. Make sure to drop on by my discussion board and let me know what you think.

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At the time thisarticle was published Stock Advisor analyst Jason Moser owns no shares of any companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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