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Xylem Upgraded to Outperform

Zacks Equity Research

On Nov 7, 2013, we upgraded our recommendation on Xylem Inc. (XYL) to Outperform from Neutral, anticipating the company’s better performance in the broader market going forward.

Why the Upgrade?

Being well positioned in the water solutions industry, Xylem presents strong growth opportunities. The company has also been leveraging on its solid potential for international expansion.

Xylem has been growing inorganically, with acquisitions contributing roughly 2% to the sales in the third quarter of 2013. Management sees further scope for inorganic growth in future, with expected expenditure for acquisitions in 2013 pegged at $200 million.

Strategic contract wins have helped increase the company’s market share in the past quarters. In 2013, Xylem won important contracts in Singapore, China, Colombia, United Arab Emirates, Sweden and Beijing. With such diversified and high-value contracts in the pipeline, Xylem is likely to improve its market share and generate higher revenues in the quarters ahead.

Additionally, Xylem’s efforts to increase shareholders’ wealth have been commendable. In the first nine months of 2013, the company has returned $107.0 million to shareholders via dividends and share repurchases, roughly doubled from $58.0 million a year ago. This August, Xylem was authorized a share buyback program worth $250 million.

Xylem’s third quarter 2013 results depict the strength of the company. Earnings per share in the quarter increased 11% year over year to 49 cents. Revenues rose 5% year over year to $965 million on the back of healthy contract wins and acquisitions.

Year-to-date, the company has generated returns of 25.7%. In the last 30 days, the Zacks Consensus Estimate for Xylem has gone up by 14.0% to $1.63 for 2013 and climbed 8.9% to $1.84 for 2014.

Other Stocks to Consider

Xylem currently carries a Zacks Rank #1 (Strong Buy). Other stocks worth a watch in the industry include DXP Enterprises, Inc. (DXPE), Graham Corp. (GHM) and Nordson Corp. (NDSN). All of these hold a Zacks Rank #2 (Buy).

Read the Full Research Report on XYL
Read the Full Research Report on NDSN
Read the Full Research Report on DXPE
Read the Full Research Report on GHM

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