Xylem (XYL) to Report Q3 Earnings: What's in the Cards?

Xylem Inc.XYL is slated to report third-quarter 2018 results before the opening bell on Oct 30.

The company pulled off an average positive earnings surprise of 1.10%, beating estimates in each of the trailing four quarters. Notably, in the last reported quarter, its earnings of 73 cents beat the Zacks Consensus Estimate by 2.82%.

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

Xylem anticipates that stronger productivity, ongoing pricing actions and volume leverage will continue driving its bottom-line performance in the near term. Notably, the company specified that the $160-million targeted cost savings for 2018 will also support profitability. It projects adjusted operating margin expansion of 60-90 basis points for 2018.

Xylem expects its pricing actions and stronger productivity to help ease the impact of prevailing headwinds owing to higher tariffs and material cost inflation.

Also, the company believes that solid end-market sales will continue to be conducive to its top-line results in the third quarter. Moreover, Xylem remains focused on becoming more competent on the back of strategic business contracts. In first-half 2018, the company secured nearly $30 million synergy deals, and expects to realize its benefits 2019 onward. Additionally, Xylem’s ongoing localization strategy will likely boost its emerging market revenues and profitability in the quarters ahead.

The Zacks Consensus Estimate for third-quarter revenues of the company’s Water Infrastructure and Applied Water segments is currently pegged at $546 million and $369 million, respectively, higher than the corresponding tallies of $520 million and $354 million reported a year ago.

However, escalating costs, if not checked, might dampen Xylem’s bottom-line performance in the to-be-reported quarter. Notably, in the June-end quarter, the same was up 12.9% year over year. Xylem stated that material cost inflation has been escalating its aggregate cost, of late. Continued input cost inflation, along with unfavorable impact of a tariff imposition, might continue to increase the company’s expenses.

Also, the company's business largely depends on third-party suppliers as well as commodity and contract manufacturing market conditions.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for Xylem in the to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Earnings ESP: Xylem has an Earnings ESP of -0.79%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Xylem Inc. Price and EPS Surprise

Xylem Inc. Price and EPS Surprise | Xylem Inc. Quote

Zacks Rank: The company carries a Zacks Rank #3, which increases the predictive power of the ESP. However, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Key Picks

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Flowserve Corporation FLS has an Earnings ESP of +1.72% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ingersoll-Rand plc IR has an Earnings ESP of +0.62% and a Zacks Rank #2.

Parker-Hannifin Corporation PH has an Earnings ESP of +0.08% and a Zacks Rank #3.

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