We have issued an updated research report on Xylem Inc. XYL on Jan 2.
This water solutions provider currently carries a Zacks Rank #4 (Sell). Its market capitalization is approximately $12 billion.
Let’s delve deeper and discuss what led to the company’s poor investment appeal.
Share Price Performances, Poor Valuation & Earnings Estimate Revision: Market sentiments have been against Xylem for quite some time now. Its stock price has decreased roughly 17.3% in the past three months versus the industry’s decline of 16.7%.
The company’s stock appears overvalued compared with the industry. On a Price/Earnings (P/E) basis, the stock is currently trading at 24.1x, higher compared with the industry’s 18.2x. Further, the stock’s current valuation multiple is above the industry’s highest levels of 20.4x for the past three months.
Furthermore, earnings estimates on the stock have been lowered in the past three months. Currently, the Zacks Consensus Estimate is pegged at $2.89 for 2018 and $3.40 for 2019, reflecting declines of 0.7% and 0.9% from the respective 90-day-ago tallies.
Xylem Inc. Price and Consensus
Xylem Inc. Price and Consensus | Xylem Inc. Quote
Higher Costs and Expenses: Xylem’s cost of sales and operating expenses increased 11.8% and 6.6%, respectively in the first nine months of 2018. Increase in raw material costs, mainly due to the implementation of tariffs, has been creating problems for the company. Tariffs had an adverse impact of roughly $5 million on third-quarter results. Further escalation in costs and operating expenses, if not controlled, can severely impact margins and profitability.
It’s worth noting here that Xylem has been suffering from these issues for quite some time. In the last five years (2013-2017), the company’s cost of sales increased 4.1% (CAGR) and operating expenses grew 2.7% (CAGR).
Long-Term Debt: Xylem’s long-term debts in the last five years (2013-2017) increased 12.9% (CAGR). Though the debt of $2,189 million at the end of the first nine months of 2018 reflects 0.5% decline from the 2017 level, we believe that further issuances are bound to increase the balance. The company’s total debt/total equity stood at 96.2%, higher than 87.3% recorded at the end of 2017.
If unchecked, high-debt levels can prove detrimental to the company’s margins and profitability in the quarters ahead.
Forex Woes: Geographical diversification is reflective of a flourishing business of Xylem. However, this diversity exposed the company to headwinds, arising from geopolitical issues and unfavorable movements in foreign currencies. In the third quarter of 2018, forex woes adversely impacted earnings by 2 cents per share.
For 2018, Xylem predicts an adverse impact of 5 cents on earnings per share from unfavorable movements in foreign currencies.
Stocks to Consider
Some better-ranked stocks in the industry are DXP Enterprises, Inc. DXPE, EnPro Industries, Inc. NPO and Luxfer Holdings PLC LXFR. All these stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for DXP Enterprises and Luxfer Holdings improved for 2019 while remained stable for EnPro Industries. Further, positive earnings surprise for the last quarter was 17.95% for DXP Enterprises, 23.64% for EnPro Industries and 60.61% for Luxfer.
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