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Xylem (XYL) Gains From Solid Demand Amid Cost Inflation Woes

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We have issued an updated research report on Xylem Inc. XYL on Apr 7.

The company is based in Rye Brook, NY, and it currently has an $18.9-billion market capitalization. It specializes in providing water solutions globally. The company presently carries a Zacks Rank #3 (Hold).

Xylem belongs to the Zacks Manufacturing - General Industrial industry, which comes under the Zacks Industrial Products sector.

In the past three months, the company’s shares have declined 0.8% compared with the industry’s growth of 83.3%. During the same timeframe, the sector has expanded 27.4% and the S&P 500 has grown 7%.

Important factors influencing Xylem are briefly discussed below.

Tailwinds and Projections: The company’s earnings and sales performance in the fourth quarter of 2020 was impressive. Earnings surpassed estimates by 17.4% and sales exceeded the same by 6%.

In the quarters ahead, the company’s diversified business structure, solid product offerings, focus on innovations and operational execution might be advantageous. Also, large contract wins as well as solid backlog at the end of fourth-quarter 2020 are beneficial.

Xylem anticipates revenues of $5.16-$5.26 billion for 2021. Organic revenues are predicted to grow 3-5% year over year, with a low- to mid-single-digit increase expected for Water Infrastructure, a low-single-digit expansion for Applied Water Systems and a mid-single-digit hike in the Measurement & Control Solutions segment. Adjusted earnings per share are expected to be $2.35-$2.60 for 2021, suggesting a rise from $2.06 reported in 2020.

Margin and Liquidity: In the quarters ahead, the company’s focus on controlling operating expenses and capital spending might be beneficial in reducing financial pressure. For 2021, it anticipates adjusted operating margin of 11.5-12.5%, suggesting a year-over-year increase of 70-170 basis points (bps).

Also, the company’s healthy liquidity position adds to its attractiveness. Notably, available liquidity under credit facilities and cash amounted to $2.7 billion at the end of 2020.

Shareholders’ Rewards: Xylem has been rewarding its shareholders with dividend payments and share buybacks over time. Its dividend payments advanced 8% year over year to $188 million in 2020. Notably, the company announced a hike of 8% in its quarterly dividend rate this February.

In addition, the company bought back shares worth $61 million, reflecting growth of 52.5% from the year-ago quarter. A healthy cash flow position will likely help Xylem reward its shareholders.

Cost Inflation: Though control actions are being taken, high costs have been an issue for Xylem over the past few quarters. For instance, cost inflation lowered adjusted operating margin by 120 bps in the fourth quarter of 2020 and 280 bps in the third quarter. Also, strategic investment lowered adjusted operating margin by 60 bps in the fourth quarter, while unfavorable volume/mix/other lowered margin by 390 bps.

In the quarters ahead, the persistence of the headwinds might be concerning.

Debts: A highly leveraged balance sheet can be concerning for Xylem. Exiting 2020, the company had long-term debts of $2.5 billion, reflecting an increase of 21.8% from the previous year. Also, it is worth mentioning here that times interest earned for Xylem was 4.7X in the fourth quarter, down from 5.3X in the third quarter. Times interest earned reflects the company’s ability to repay debts.

Earnings Estimate Revisions: Xylem’s earnings estimates have decreased in the past 60 days. Currently, the Zacks Consensus Estimate for earnings is pegged at 37 cents for the first quarter of 2021 and 59 cents for the second quarter of 2021, reflecting declines of 2.6% and 1.7% from the 60-day-ago respective figures.

Xylem Inc. Price and Consensus

Xylem Inc. Price and Consensus
Xylem Inc. Price and Consensus

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

Also, earnings estimates are pegged at $2.57 for 2021, marking a fall of 0.4% from the 60-day-ago figures.

Key Picks

Some better-ranked stocks in the industry are EnPro Industries, Inc. NPO, Applied Industrial Technologies, Inc. AIT and Kadant Inc. KAI. While EnPro currently sports a Zacks Rank #1 (Strong Buy), both Applied Industrial and Kadant carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for these stocks have improved for the current year. Further, earnings surprise for the last reported quarter was 143.14% for EnPro Industries, 28.95% for Applied Industrial and 18.46% for Kadant.

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