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Can High Costs & Forex Woes Hurt Xylem (XYL) in Q2 Earnings?

Zacks Equity Research

Xylem Inc. XYL is scheduled to release second-quarter 2019 results on Aug 1, before the market opens.

The company delivered better-than-expected results in one of the last four quarters while recorded in-line results twice and lagged estimates once. Average earnings surprise was a negative 1.88%. In the last reported quarter, the company’s earnings of 52 cents lagged the Zacks Consensus Estimate of 58 cents by 10.34%.

In the past three months, shares of this water solutions provider have declined 2.8% against the industry’s growth of 0.2%.

Let us see how things are shaping up for Xylem this quarter.

Factors to Affect Q2 Results

We believe that the company is poised for long-term growth, backed by rising needs for solutions to address water scarcity, water affordability and resiliency. Also, strengthening businesses in end markets served, rising exposure in emerging nations, product innovations and shareholder-friendly policy might be advantageous for Xylem. However, the presence of multiple issues in the near term will likely adversely influence results, including that of the second quarter of this year.

Adverse impacts of unfavorable movements in foreign currencies have been troubling Xylem. Though separate estimates for the second quarter have not been provided, the company predicts earnings dilution of 4 cents from forex woes this year. In addition, escalation in costs due to tariffs, realignment initiatives and other inflationary pressures as well as growth investments and difficulties in getting products from suppliers in Mexico might have had adverse impacts on second-quarter results.

For the to-be-reported quarter, Xylem anticipates organic sales to grow roughly 4-6%, down from 8% registered in the year-ago quarter. On a segmental basis, organic sales will grow 5-7% for the Water Infrastructure segment, 3-5% for Applied Water, and 4-6% for Measurement & Control Solutions. Adjusted operating margin is predicted to be 14.3-14.5%.

For the Water Infrastructure segment, the Zacks Consensus Estimate for revenues in the second quarter of 2019 is pegged at $548 million, suggesting a 5.5% decline from that generated in the year-ago quarter.

Likewise, second-quarter revenue estimates for the Applied Water segment is pegged at $396 million, suggesting a 1.2% fall from sales generated in the year-ago quarter. For the Measurement & Control Solutions segment, revenue estimates are pegged at $396 million. This segment’s average sales for the last three quarters were -1.14%.

Earnings Whispers

Our proven model provides some idea on stocks that are about to release their earnings results. Per the model, a stock needs a combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for a likely earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The case with Xylem has been provided below.

Earnings ESP: The company has an Earnings ESP of -2.99%, with the Most Accurate Estimate of 77 cents below the Zacks Consensus Estimate of 79 cents.

Xylem Inc. Price, Consensus and EPS Surprise


Xylem Inc. Price, Consensus and EPS Surprise

Xylem Inc. price-consensus-eps-surprise-chart | Xylem Inc. Quote

Zacks Rank: Xylem currently carries a Zacks Rank #4 (Sell).

Note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies in the Zacks Industrial Products sector that you may want to consider as these have the right combination of elements to post an earnings beat this quarter, according to our model.

Axon Enterprise, Inc. AAXN has an Earnings ESP of +10.21% and a Zacks Rank #1 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

AptarGroup, Inc. ATR currently has an Earnings ESP of +0.56% and a Zacks Rank #2.

Sealed Air Corporation SEE has an Earnings ESP of +1.34% and a Zacks Rank #2 at present.

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