U.S. Markets closed

Will Xylem (XYL) Miss Earnings Estimates?

Zacks Equity Research

Water solutions provider Xylem Inc. (XYL) is set to report third-quarter 2013 results before the opening bell on Oct 29. In the last reported quarter, it delivered 18.2% negative earnings surprise. Let’s see how things are shaping up for this announcement.

Factors to Consider

In the second quarter of 2013, Xylem posted disappointing results with earnings per share of 36 cents, decreasing 27% year over year. Total revenue in second quarter declined marginally year over year to $960 million. Revenues were influenced by strong business in the U.S. residential, commercial and agricultural services, offset by weak demand in Europe and the deteriorating public utilities and industrial markets.

In the third quarter 2013, Xylem has launched various products to gain market share and also won many contracts across the globe. However, persistent headwinds from the European demand are likely to impact result in the quarter. To add to the peril, negative foreign currency translation impact will remain a possible risk, as it affected second quarter 2013 results due to appreciation of the U.S. dollar and Swedish krona against other currencies.

The disappointing second quarter 2013 results led to a downward revision in 2013 guidance. The company now expects adjusted earnings per share for full-year 2013 in the range of $1.40-$1.50, down from previous guidance of $1.79-$1.89. Revenues in 2013 are expected to be roughly $3.7 billion, compared with previous projection of $3.9 billion.

Earnings Whispers

Our proven model does not conclusively show that Xylem is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, #2 or #3 for this to happen. That is not the case here as we see below.

Negative Zacks ESP: The Expected Surprise Prediction or ESP for Xylem is -2.86% since the Most Accurate Estimate stands at 34 cents per share, while the Zacks Consensus Estimate is higher at 35 cents.

Zacks Rank: Xylem’s Zacks Rank #4 (Sell) when combined with a negative ESP lowers the possibility of a positive surprise prediction. We caution against stocks with Zacks Rank #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Other stocks in the industrial goods sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Littelfuse Inc. (LFUS), earnings ESP of +1.67% and a Zacks Rank #2 (Buy).

Barnes Group Inc. (B), withEarnings ESP of +3.77% and a Zacks Rank #3 (Hold).

Flowserve Corp. (FLS), withEarnings ESP of +0.95% and a Zacks Rank #3 (Hold).

Read the Full Research Report on XYL
Read the Full Research Report on FLS
Read the Full Research Report on B
Read the Full Research Report on LFUS

Zacks Investment Research