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Xylem (XYL) Down 6.8% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Xylem (XYL - Free Report) . Shares have lost about 6.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Xylem due for a breakout? 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 Lags Q1 Earnings & Sales Estimates, Lowers View

Xylem reported weaker-than-expected results for the first quarter of 2019, with earnings lagging estimates by 10.3%. This came in after two consecutive quarters of reporting in-line results.

Adjusted earnings in the quarter under review were 52 cents per share, lagging the Zacks Consensus Estimate of 58 cents. However, on a year-over-year basis, the bottom line increased 2% from the year-ago figure of 51 cents.

Bottom-line results include adverse impact of 5 cents per share from unfavorable movements in foreign currencies.

Organic Growth Drives Revenues

Xylem's revenues were $1,237 million in the quarter under review, reflecting growth of 1.6% from the year-ago quarter. Organic sales in the quarter expanded 6% on the back of strengthening end markets. Businesses in emerging markets and the United States were healthy.

This improvement was driven by 6% organic sales growth, partially offset by 4% adverse impact of foreign currency translations.

However, the top line lagged the Zacks Consensus Estimate of $1,249 million.

Orders in the quarter under review were flat year over year at $1,315 million. Organically, orders reflect growth of 4%.

On a geographical basis, organic sales in the reported quarter improved 11% in the United States and 12% in the emerging market while declined 2% in Western Europe. Alternatively, organic revenues grew 6% in public utility end market, 4% in industrial, 12% in commercial and 4% in residential.

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

Revenues in the Water Infrastructure segment were $482 million, up 0.4% year over year. This upside stemmed from improved utilities as well as industrial end-market demand.

The Applied Water segment generated revenues of $379 million in the first quarter, up 3.6% year over year. This upswing primarily stemmed from the robust commercial end-market.

Quarterly revenues of the Measurement & Control Solutions segment were $376 million, up 1.3% year over year. This improvement stemmed from growth in the water sector business in North America.

Operating Margin Falls Y/Y

In the quarter under review, Xylem's cost of sales increased 0.8% year over year to $763 million while selling, general and administrative expenses expanded 2.4% to $303 million, and research and development expenses grew 24.4% to $51 million.

Adjusted operating income in the quarter under review decreased 1.5% year over year to $133 million. Also, adjusted operating margin decreased 30 basis points (bps) to 10.8% due to adverse impacts of sales mix and cost-related issues.

Balance Sheet and Cash Flow

Exiting the first quarter, Xylem had cash and cash equivalents of $275 million, down 7.1% from $296 million at the end of the last reported quarter. Long-term debt balance decreased 0.3% sequentially to $2,044 million.

In the first quarter, the company generated net cash of $83 million from operating activities, reflecting growth of 31.7% from the year-ago quarter. Capital expenditure was $69 million, above $61 million in the first quarter of 2018. Free cash flow in the quarter was $14 million.

During the quarter, the company paid dividends amounting to $44 million and repurchased shares worth $39 million.

Outlook

For 2019, Xylem maintained revenues guidance at $5.3-$5.4 billion, reflecting year-over-year growth of 2-4%. Organic sales are still predicted to increase 4-6%.

Adjusted operating margin will likely be 14.5-14.9%, down from 14.7-15.2% due to weak first-quarter results (4-cents impact) and continued prevalence of forex woes (4-cents impact). Adjusted earnings will likely be $3.12-$3.32, down from $3.20-$3.40 per share mentioned earlier. The revised projection reflects year-over-year growth of 8-15%.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Xylem has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, 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.

Outlook

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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