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Xylem (XYL) Exhibits Strong Prospects, Headwinds Remain

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Xylem Inc. (XYL - Free Report) is poised to benefit from strength in its wastewater utilities business, driven by a solid demand environment in North America and Europe and capital projects in emerging markets. Strengthening test business and rising demand for smart water solutions and digital offerings will likely support the company’s clean water utilities business. Also, healthy industrial dewatering business globally and robust replacement business in the United States are likely to drive its performance in 2022. For 2022, it anticipates revenues of $5.25-$5.35 billion, with organic sales growth of 4-6%.

The company’s solid backlog level and product offerings, along with its focus on innovation, efforts to boost growth and effective operational execution, are likely to be beneficial in the quarters ahead. Also, its effective pricing actions are anticipated to mitigate the adverse impact of cost inflation and supply-chain constraints.

XYL focuses on rewarding shareholders through dividend payments and share repurchases. In first-quarter 2022, it used $55 million for paying out dividends and repurchasing shares worth $51 million. The quarterly dividend rate was hiked by 7% in February 2022. For 2022, it expects dividend payouts of $215 million.

However, Xylem has been experiencing escalating costs and expenses over time. In first-quarter 2022, its cost of sales, and selling, general and administrative expenses jumped 5.1% and 1%, respectively, on a year-over-year basis. Also, research and development expenses increased 4%. The company has been experiencing the adverse impacts of labor shortage, logistics issues and supply-chain woes.

The company’s high-debt profile also poses a concern. Its long-term debt balance was $1,878 million, while its cash and cash equivalents were $1,117 million at the end of the first quarter. Any further increase in debt levels can raise its financial obligations.

Zacks Investment Research
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In the past three months, this Zacks Rank #3 (Hold) stock has lost 4.8% compared with the industry’s decline of 19.8%.

Key Picks

Some better-ranked companies from the same space are discussed below.

Applied Industrial Technologies, Inc. (AIT - Free Report) presently sports a Zacks Rank #1 (Strong Buy). The company delivered a four-quarter earnings surprise of 25.40%, on average.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Industrial’s earnings estimates have increased 5.9% for fiscal 2022 (ending June 2022) in the past 30 days. Its shares have gained 12% in the past three months.

Roper Technologies, Inc. (ROP - Free Report) presently has a Zacks Rank #2 (Buy). Its earnings surprise in the last four quarters was 2.03%, on average.

In the past 30 days, Roper’s earnings estimates have increased 1.1% for 2022. ROP’s shares have lost 1.1% in the past three months.

Ferguson plc (FERG - Free Report) presently carries a Zacks Rank #2. Its earnings surprise in the last reported quarter was 11.56%.

In the past 30 days, Ferguson’s earnings estimates have been stable for fiscal 2022 (ending July 2022). FERG’s shares have lost 23.4% in the past three months.