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Softness in End Markets and Forex Woes to Hurt Xylem (XYL)

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Xylem Inc. (XYL - Free Report) seems to have lost its sheen to weakness in certain end markets as well as forex woes, high costs and huge debts. Also, weak price performance and lowered earnings estimates are reflective of bearish sentiments for the stock.
The company provides water solutions worldwide. It has a market capitalization of $13.6 billion and a Zacks Rank #4 (Sell) at present.

The company belongs to the Zacks Manufacturing – General Industrial industry, currently at the bottom 23% (with the rank of 196) of more than 250 Zacks industries. We believe that the industry is suffering from global uncertainties, unfavorable movements in foreign currencies and other headwinds. Cost escalation due to tariff woes, high labor costs and freight charges are also affecting the industry.

Notably, Xylem recorded in-line results in three of the last four quarters, while missed estimates once. It has a negative earnings surprise of 2.59%, on average, for the last four quarters.

Over the past three months, the company’s shares have declined 4.9% against the industry’s growth of 4.5%.

Factors Affecting Investment Appeal

Top-Line Weakness: Xylem’s sales lagged estimates by 2.5% in third-quarter 2019, while grew 0.7% year over year. Orders were down 1% year over year.

For 2019, Xylem lowered its revenue projection to $5.24-$5.27 billion from the previously stated $5.29-$5.38 billion. Organic sales are predicted to increase 3-4% versus 5-6% growth mentioned earlier.

The company expects industrial businesses in Latin America, China and Europe to be soft.  It anticipates flat organic sales on a year-over-year basis for the industrial market compared with low-single-digit growth mentioned earlier. For the utilities market, the company expects mid-single-digit growth in organic sales, down from mid to high-single-digit growth stated earlier.

Oil & gas/mining markets will likely be weak in 2019. For the commercial market, Xylem anticipates low to mid-single-digit organic growth versus mid-single-digit growth mentioned previously.

Margin and Debt-Related Issues: We believe that rising costs and operating expenses can have adverse impacts on the company’s margins in the quarters ahead. In the third quarter of 2019, high cost of sales hurt its operating margin by 2.8 percentage points. Also, the company’s operating margin was lowered to the tune of 50 basis points due to investments.

For 2019, the company predicts 13.8-14% adjusted operating margin, down from previously mentioned 14.3-14.5%.

In addition, high debt levels can be concerning, as it increases financial obligations. At the end of third-quarter 2019, Xylem’s long-term debts were $2,030 million. It predicts interest expenses of $68 million for 2019.

Forex Woes: Geographical diversification — with presence in the United States, the Asia Pacific, Europe and various other nations — exposed Xylem to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. Notably, unfavorable movements in foreign currencies adversely impacted the company’s earnings by 3 cents per share in the third quarter of 2019.

For 2019, Xylem expects forex woes to adversely impact earnings by 2-3%.

Bottom-Line Projections: The company lowered the earnings projection to $3.01-$3.03 per share for 2019, with the mid-point being $3.02. The previous guidance was $3.12-$3.22 per share (with the mid-point being $3.17).

Moreover, the Zacks Consensus Estimate for Xylem’s earnings has been lowered in the past 60 days. The consensus estimate for earnings per share is currently pegged at $3.02 for 2019 and $3.35 for 2020, reflecting respective declines of 4.4% and 7.7% from the 60-day-ago figures.

Also, earnings estimates for fourth-quarter 2019 and first-quarter 2020 were declined 13.6% to 89 cents and 9% to 61 cents from the respective 60-day-ago figures.

Xylem Inc. Price and Consensus


Xylem Inc. Price and Consensus

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

Stocks to Consider

Some better-ranked stocks in the industry are Tennant Company TNC, DXP Enterprises, Inc DXPE and Standex International Corporation SXI. While Tennant currently sports a Zacks Rank #1 (Strong Buy), DXP Enterprises and Standex carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for Tennant and DXP Enterprises have improved for the current year, while the same has been unchanged for Standex. Further, positive earnings surprise for the last reported quarter was 40% for Tennant, 16.39% for DXP Enterprises and 2.11% for Standex.

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