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Why Is Xylem (XYL) Up 7.8% Since Last Earnings Report?

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A month has gone by since the last earnings report for Xylem (XYL - Free Report) . Shares have added about 7.8% in that time frame, outperforming the S&P 500.

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

Xylem Tops on Q2 Earnings & Revenues, Hikes '21 View

Xylem reported better-than-expected results for second-quarter 2021. Its earnings surpassed the Zacks Consensus Estimate by 4.8%. This is the fifth consecutive quarter of an earnings beat for the company. Also, quarterly sales surpassed estimates by 2.9%.

Adjusted earnings in the quarter under review were 66 cents per share, surpassing the Zacks Consensus Estimate of 63 cents. Also, the bottom line increased 65% from the year-ago figure of 40 cents on the back of higher sales generation and margin improvement.

It is worth noting that movements in foreign currencies had a positive impact of 5 cents per share on earnings.

Revenue Details

In the quarter under review, Xylem’s revenues were $1,351 million, reflecting an increase of 16.5% from the year-ago quarter. Organic sales in the quarter increased 11% on the back of healthy demand in its three segments.

The company’s revenues surpassed the Zacks Consensus Estimate of $1,313 million.

Orders in the reported quarter increased 35% year over year to $1,660 million. Organically, orders grew 29%.

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

Revenues for the Water Infrastructure segment were $569 million, up 13.6% year over year. Organic sales in the reported quarter grew 6% year over year. Businesses in both industrial and utilities end markets improved in the quarter.

The Applied Water segment generated revenues of $414 million in the second quarter, up 22.8% year over year. Organic sales increased 18% on a year-over-year basis. Businesses in commercial, industrial and residential markets were healthy.

Quarterly revenues of the Measurement & Control Solutions segment were $368 million, up 14.3% year over year. Organic sales were up 11% year over year. Benefits from high demand for water quality testing applications and high volumes aided results.

Margin Profile

In second-quarter 2021, Xylem’s cost of sales increased 14.5% year over year to $831 million. As a percentage of revenues, it represented 61.5% versus 62.6% in the year-ago quarter. Selling, general and administrative expenses increased 5.6% to $304 million. Meanwhile, research and development expenses grew 20.5% to $53 million.

In the reported quarter, the company’s adjusted earnings before interest, tax, depreciation and amortization were $234 million, increasing 32.2% from the year-ago quarter. Margin in the quarter grew 200 basis points (bps) year over year to 17.3%. Productivity gains, volume leverage and favorable mix aided the results.

Adjusted operating income was $166 million in the quarter under review, up 53.7% year over year. Operating margin grew 300 bps to 12.3%. Interest expenses in the reported quarter totaled $21 million, up from $18 million in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter of 2021, Xylem had cash and cash equivalents of $1,840 million, increasing 9% from $1,688 million at the end of the last reported quarter. Long-term debt balance grew 0.2% sequentially to $2,460 million.

In the reported quarter, the company generated net cash of $232 million from its operating activities, reflecting an increase of 28.2% from the year-ago quarter. Capital expenditure was $41 million, down 6.8% from the year-ago figure of $44 million. Free cash flow was $191 million, up 39.4% year over year.

Shareholder-Friendly Policies

In the first half of 2021, the company paid out dividends of $102 million, reflecting an increase from $95 million distributed in the year-ago period. Share repurchased amounted to $68 million, up 13.3% year over year.

Outlook

For 2021, Xylem increased its organic revenue growth projection to 6-8% from the previously stated 5-7%. Total revenues are predicted to increase 9-11% as compared with 8-10% mentioned previously.

Adjusted earnings per share in the year are anticipated to be $2.55-$2.70, as compared with $2.50-$2.70 mentioned previously. The guidance mirrors an improvement in demand, pricing actions and commercial activities, partially offset by supply-chain woes and inflation headwinds.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -8.44% 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise 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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