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Xylem (XYL) Down 2.8% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Xylem (XYL). Shares have lost about 2.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Xylem due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Xylem Posts In-Line Earnings & Sales in Q2, Lowers View

Xylem reported in-line results for the second quarter of 2019, with earnings and sales meeting respective estimates. This came in after the company reported negative earnings and sales surprise of 10.34% and 0.99%, respectively, in first-quarter 2019.

Adjusted earnings in the quarter under review were 79 cents per share, in line with the Zacks Consensus Estimate. On a year-over-year basis, the bottom line grew 8.2% from the year-ago figure of 73 cents. Its bottom-line results included an adverse impact of one cent per share from unfavorable movements in foreign currencies.

Organic Growth Drives Revenues

Xylem’s revenues were $1,345 million in the quarter under review, reflecting growth of 2.1% from the year-ago quarter. Organic sales in the quarter expanded 5% on strengthening end markets, especially utilities. Businesses in China, India and the United States were healthy.

The company’s revenues were in line with the Zacks Consensus Estimate of $1,345 million.

Orders in the quarter under review were up 1% year over year at $1,392 million. Organically, orders reflect growth of 4%.

The company reports net sales under three segments — Water Infrastructure, Applied Water, and Measurement & Control Solutions. The segmental information is briefly discussed below:

Revenues in the Water Infrastructure segment were $561 million, up 2.7% year over year. Organic sales were up 6% year over year on improved utilities and industrial end-market demand. However, weakness in the Western Europe business played spoilsport.

The Applied Water segment generated revenues of $394 million in the second quarter, up 1.5% year over year. Organic sales improved 4% on growth in industrial and commercial end markets. Results in emerging nations and the United States were healthy.

Quarterly revenues of the Measurement & Control Solutions segment were $390 million, up 1.8% year over year. Organic sales improved 6% on growth in the water sector business in North America.

Operating Margin Improves Y/Y

In the quarter under review, Xylem’s cost of sales rose 2.6% year over year to $819 million while selling, general and administrative expenses expanded 0.3% to $294 million, and research and development expenses declined 6% to $47 million.

Adjusted operating income in the quarter under review grew 5.5% year over year to $192 million. Also, adjusted operating margin rose 50 basis points (bps) to 14.3%.

Balance Sheet and Cash Flow

Exiting the second quarter, Xylem had cash and cash equivalents of $383 million, up 39.3% from $275 million at the end of the last reported quarter. Long-term debt balance inched up 0.3% sequentially to $2,051 million.

In the first half of 2019, the company generated net cash of $206 million from operating activities, reflecting growth of 2.5% from the year-ago period. Capital expenditure was $129 million, above $111 million in the first half of 2018. Free cash flow in the period was $77 million.

In the first half of 2019, the company paid dividends amounting to $87 million and repurchased shares worth $39 million.

Outlook

In the quarter ahead, Xylem anticipates gaining from rising demand (spurred by water sector’s digitization) and investments in boosting technological capabilities. Sales growth and margin expansion are predicted for the second half of 2019.

For 2019, Xylem anticipates revenues of $5.29-$5.38 billion versus the previously stated $5.3-$5.4 billion. Organic sales are still predicted to rise 5-6% versus the earlier mentioned 4-6%.

Adjusted operating margin will likely be 14.3-14.5%, down from 14.5-14.9% stated previously. Adjusted earnings will likely be $3.12-$3.22 per share, down from $3.12-$3.32 mentioned earlier. The revised projection suggests year-over-year growth of 8-12%.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months. The consensus estimate has shifted -5.8% due to these changes.

VGM Scores

Currently, Xylem has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Xylem has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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