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Xylem (XYL) Displays Bright Prospects Despite Headwinds

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On Jun 24, we issued an updated research report on Xylem Inc. (XYL - Free Report) .

In the past three months, this Zacks Rank #3 (Hold) stock has returned 0.6% compared with the industry’s growth of 18.6%.



Existing Business Scenario

Xylem is poised to benefit from product introduction, innovation and focus on operational execution in the quarters ahead. The company’s diversified business structure enables it to offset the weakness in one or more end markets, with strength across others. Also, some of the actions taken by Xylem to control capital spending and operating expenses will help it to offset some financial stress amid the coronavirus pandemic. Notably, the measures are likely to yield cost savings of $100 million in 2020.

Also, Xylem’s efforts to lower its debt level will benefit it going forward. It is worth noting that in the last three years (2017-2019), the company's long-term debt declined 2.5% (CAGR). At the end of first-quarter 2020, the metric was at $2,031 million, reflecting a 0.4% decline on a sequential basis. Also, the company’s interest expenses recorded a decline of 11.1% year over year in the first quarter. Notably, it is less leveraged compared with the industry, with long-term debt-to-capital of 41.9% and 50.2%, respectively.

However, the company has been witnessing weakness across commercial, utilities, residential and industrial markets. For the industrial market, it is likely to experience challenges in applied water, dewatering, beverage dispensing and marine businesses. Also, project delays caused by factory shutdowns will likely have a short-term impact on the commercial market. In addition, for the residential market, weaknesses on account of the pandemic remain concerning.

Further, cost-inflation woes have been hurting the company’s margin over the past few quarters. For instance, in the first quarter of 2020, its operating margin was lowered by 260 basis points (bps) owing to the cost inflation. Also, the same metric reduced the operating margin by 280 bps and 270 bps in the third and fourth quarters of 2019. In addition, the pandemic might continue hurting the company’s margins in the quarters ahead.

Key Picks

Some better-ranked stocks are Altra Industrial Motion Corp. (AIMC - Free Report) , Broadwind Energy, Inc. (BWEN - Free Report) and Ingersoll Rand Inc. (IR - Free Report) . While Altra Industrial currently sports a Zacks Rank #1 (Strong Buy), Broadwind Energy and Ingersoll Rand carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Altra Industrial delivered a positive earnings surprise of 9.78%, on average, in the trailing four quarters.

Broadwind Energy delivered a positive earnings surprise of 50.00%, on average, in the trailing four quarters.

Ingersoll Rand delivered a positive earnings surprise of 3.47%, on average, in the trailing four quarters.

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