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On Oct 10, 2013, we raised our recommendation on Xylem Inc. (XYL - Analyst Report) to Neutral from Underperform, based on huge contract wins.

Why the Upgrade?

Xylem engages in the sales and distribution of products like pumps, valves, heat exchangers, waste systems and membrane filtration products, through direct sales force along with independent channel partners. The company has been successfully taking steps to grow internationally. In the process, it has won contracts from the United Arab Emirates, Beijing, Singapore, Sweden and Colombia in 2013. Recently, Xylem won the largest ozone contract in China, worth $1.9 billion. With such diversified and high-value contract wins, Xylem is expected to generate higher revenues and gain greater market share in the quarters ahead.

Xylem’s inorganic growth is also in keeping with the company’s strategy to increase overseas operations. In June, the company acquired the Germany-based private company Pollman Pumpen Ltd. for $3 million. Leveraging Pollman Pumpen’s expertise and experience, Xylem intends to enhance its existing foothold in the nation with its products such as Flygt and Godwin.

However, the company has been facing headwinds from the declining European demand over the past few quarters. The demand deterioration in Europe pulled down the revenues for transport, treatment and test products, in the first quarter of 2013. The trend is expected to continue in the quarters ahead and the company sees little scope for improvement.

Having operations in several countries exposes Xylem to various risks, such as foreign currency risks and socio-political risks. In the first quarter of 2013, the company’s revenues were negatively affected by foreign currency translation impacts as a result of the appreciation of the U.S. dollar and Swedish krona against other currencies.

Other Stocks to Consider

Xylem currently carries a Zacks Rank #4 (Sell). Other stocks worth a watch in the industry include Manitex International, Inc. (MNTX - Snapshot Report), The Middleby Corporation (MIDD - Analyst Report) and Colfax Corporation (CFX - Analyst Report). While Manitex International and Middleby carry a Zacks Rank #1 (Strong Buy), Colfax carries a Zacks Rank #2 (Buy).

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