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Why Is Xylem (XYL) Up 2.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Xylem (XYL - Free Report) . Shares have added about 2.6% in that time frame, underperforming 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 catalysts.

Second-Quarter 2018 Results

Xylem reported better-than-expected results for second-quarter 2018.

Earnings/Revenues

Quarterly adjusted earnings of 73 cents per share outpaced the Zacks Consensus Estimate of 71 cents. The bottom line also came in 23.7% higher than the year-ago tally.

Quarterly revenues came in at $1,317 million, beating the Zacks Consensus Estimate of $1,269 million. Also, the top-line results improved 13.1% year over year.

Segment Details

Revenues in the Water Infrastructure segment came in at $546 million, up 13.3% year over year. This upside stemmed from improved utilities and industrial end-market demand.

Applied Water segment generated revenues of $388 million in the June-end quarter, up 7.5% year over year. This upswing stemmed from robust industrial and commercial end-market business.

Quarterly revenues of the Measurement & Control Solutions segment came in at $383 million, significantly up 19.3% year over year. This improvement stemmed from robust Sensus, as well as legacy analytic business growth.

Margins/Costs

Xylem’s cost of revenues in the second quarter was $798 million, up 12.9% year over year. Gross profit margin was 39.4%, up 10 basis points (bps) year over year.

Selling, general and administrative expenses totaled $293 million, up from $270 million incurred in the year-ago period. Research and development expenses were $50 million, as against $44 million incurred in the year-ago quarter. Adjusted operating margin in the quarter under review was 13%, up 120 bps year over year.

Balance Sheet/Cash Flow

Xylem exited the second quarter with cash and cash equivalents of $321 million compared with $414 million as of Dec 31, 2017. Long-term debt was $2,179 million, as against $2,200 million recorded at the end of 2017.

In the first six months of 2018, Xylem generated $201 million cash from operating activities, higher than $151 million cash generated in the comparable period last year. Capital expenditure was $111 million, as against $77 million incurred in the year-earlier period.

Outlook

Xylem stated that its pricing actions and stronger productivity will help mute the impact of prevailing headwinds owing to higher tariffs and material cost inflation.

The company currently anticipates generating revenues of roughly $5.2 billion in 2018, estimating organic revenue growth of 6-7%. In addition, the adjusted earnings view for the current year is pegged at $2.85-$2.95 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth investors than those looking for value and momentum.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Interestingly, Xylem has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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