A few months ago we discussed a stock we had our eye on, but didn't recommend as a buy. The stock was Ecolab (ECL), a global leader in some of the world’s fastest-growing industries including sanitation, water treatment, and the efficient use of chemicals in unconventional energy. We promised that if this richly valued stock became more reasonably priced, we would recommend buying it.

Now we’re getting our chance. In the two earnings reports since then, profits were above expectations, leaving both the nominal and relative multiple lower. Those stronger profits in turn suggest that annual profit growth could accelerate to close to 20 percent over the next five years, effectively pushing down its PEG ratio to around 1.3, well within the parameters of top growth companies.

The industries in which Ecolab plies its trade currently represent a combined market of around $100 billion, and they’re growing at an annual clip averaging in the low to mid teens or better. Within just the next two to three years the Chinese market alone in these industries should climb to $15 billion from below $10 billion today. With a share in the low teens across all these markets, Ecolab is the leading player.

Ecolab gets high marks for two major acquisitions made this decade. Nalco, one of the world’s largest water treatment companies, added 40 percent to revenues and is in the thick of one of the most important industries going forward. It is hard to overstate the global need for water treatment. Water is an underpriced commodity today. Its growing scarcity and the certainty of much higher prices for water use in coming years will translate into an urgent and rapidly intensifying demand to conserve water and treat wastewater, both in the U.S.—whose water infrastructure is deplorably antiquated (see p.9)—and around the world. Much of the developing world, including China is facing water scarcity issues for the foreseeable future.

The more recent and less expensive acquisition was of Champion Technologies, which produces specialized chemicals essential to the energy industry, especially in energy production and transmission. For instance, its products let producers control the flow of oil in any well. They also make it possible for nonconventional oil to continue to be extracted after the initial, easier production has been exhausted. And along with Nalco and Ecolab’s other divisions, Champion helps handle water management in unconventional drilling areas.

Ecolab’s size and focus on research have resulted in a stream of products for markets intertwined with water and energy but potentially even bigger—food and food services. Safe food handling practices and the organization of energy and water management across national borders for major food providers add up to a potential market approaching $50 billion by the end of the decade. The intertwining of food, energy, and water, which we discussed recently, will work mightily to the company’s advantage.

Across all its different specialties, Ecolab’s international footprint and customer base of international companies lets it leverage its success in one part of the world to success in another, as client companies benefiting from Ecolab’s services and products on one continent will likely want them for their other facilities elsewhere as well.

Prior to acquiring Nalco and Champion, Ecolab was considered one of the surest defensive stocks around, growing through thick and thin. Only in 2001 did a marginal drop in profits interrupt its steady long-term growth. Reliable growth and an excellent balance sheet translated into a PEG ratio averaging above 2 and a relative P/E of about 1.5.

While debt from the recent acquisitions has temporarily reduced one aspect of its defensiveness, the company has gained substantially more growth—and also significantly greater free cash flow, which will help reduce debt. Indeed, with at least 5 percentage points added to long-term growth and prospects for a quick return to a pristine balance sheet, the company merits valuation metrics at least on a par with the past. As a result we expect investors to benefit from a combination of rising profits and at least slightly rising valuations. Ecolab is one of the best-situated long-term growth investments around.