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Here's Why Hold Strategy is Apt for Xylem (XYL) Stock Now

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Xylem Inc. (XYL - Free Report) is backed by multiple tailwinds despite the adverse impacts of cost inflation and softness in the Applied Water segment due to weakness in the residential end market.

Let’s delve deeper to unearth the factors that are driving this Zacks Rank #3 (Hold) company.

Business Strength: Resiliency across the utilities and industrial water applications end markets augurs well for Xylem. The Measurement & Control Solutions (M&CS) segment is benefiting from improving supply chains and strong demand for pipeline assessment services. For 2023, the company expects M&CS segment’s organic revenues to increase approximately 20%. Growth in the developed and emerging markets is boosting the Water Infrastructure segment’s performance. The company expects Water Infrastructure organic revenues to increase in the high-single digits in the current year.

Strong price realization and backlog execution in the United States and emerging markets are key catalysts to the Applied Water segment’s growth. Strong industrial demand and recovery in China operations should foster the unit’s growth. For 2023, Xylem expects the segment’s organic revenues to increase in the mid-single digits.

Xylem Inc. Price and Consensus

Xylem Inc. Price and Consensus

Xylem Inc. price-consensus-chart | Xylem Inc. Quote

Healthy Margin Performance: Higher volumes, productivity savings and pricing actions are supporting Xylem’s margins. The company’s adjusted EBITDA margin improved to 19.1% in the second quarter of 2023 compared with 16.6% in the year-ago period. For 2023, XYL expects adjusted EBITDA margin to be approximately 18%, better than the previous expectation of 17.5-18%. Due to the essential nature of the business, demand remains robust. Strong growth in the United States, Western Europe and emerging markets is driving Xylem’s top line (up 20.3% year over year in the first half of 2023).
Expansion Initiatives: Xylem believes in acquiring businesses/assets to expand its product offerings. The company acquired mission-critical water treatment solutions and services provider, Evoqua, in May 2023. Evoqua’s advanced water and wastewater treatment capabilities and exposure to key industrial markets complement Xylem’s portfolio of solutions across the water cycle. The acquisition bolstered Xylem’s position in water technologies, solutions and services, and strengthened its foothold in lucrative end markets. The transaction is expected to deliver run-rate cost synergies of $140 million (out of which $40 million is expected by 2023-end) within three years upon closing. It is also expected to strengthen the company’s balance sheet.

Xylem has raised its 2023 guidance to include contributions from the Evoqua acquisition. The company now expects revenues of $7.2 billion ($1.1 billion expected from the Evoqua acquisition) in 2023, reflecting a 30% jump on a reported basis and 9-10% on an organic basis. Previously, the company anticipated total revenues to increase 8-9% on both organic and reported basis. XYL expects adjusted earnings of $3.50-$3.70 per share (45 cents expected from Evoqua acquisition) for 2023 compared with $3.15-$3.35 anticipated earlier. The company boosted its earnings guidance on strong demand and commercial and operational momentum.

Rewards to Shareholders: Xylem’s commitment to reward shareholders through dividends and share buybacks is encouraging. In the first six months of 2023, Xylem paid dividends of $139 million, up 26.4% year over year. The company also bought back shares worth $9 million in the same period. In February 2023, the company hiked its dividend by 10%.

Stocks to Consider

Some better-ranked stocks within the broader Industrial Products sector are as follows:

Flowserve Corporation (FLS - Free Report) presently sports a Zacks Rank #1 (Strong Buy). The company pulled off a trailing four-quarter earnings surprise of 6.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks.

Flowserve has an estimated earnings growth rate of 79.1% for the current year. The stock has jumped around 28% so far this year.

Graham Corporation (GHM - Free Report) currently flaunts a Zacks Rank #1. The company pulled off a trailing four-quarter earnings surprise of 243.1%, on average.

Graham has an estimated earnings growth rate of 400% for the current fiscal year. The stock has rallied 61% so far this year.

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