Why Xylem (XYL) Is A Must-Add Stock To Your Portfolio
Zacks Investment Research | Feb 06, 2018 06:20AM ET
The equity universe has been witnessing an upward trend, of late, recording gains of 2.4%, 3% and 3.4% for the S&P 500, Nasdaq and Dow Jones Industrial Average, respectively, over the last three months.
An improving U.S. economy will likely bring to the forefront some winners across the market this year. However, speculations regarding a probable inflation spike (due to outstanding growth in U.S. wage rates) and a subsequent hike in interest rates remains a cause of concern.
Consequently, investors must not invest in typical bets without a clear roadmap.
Among the numerous potential gainers, adding Xylem Inc. (NYSE:XYL) to your portfolio would likely be a promising move.
Over the last month, shares of this Zacks Rank #2 (Buy) company have gained 4.6%, as against the 4.2% loss incurred by the industry .
Notably, the attractiveness of this stock as a current investment choice is further accentuated by its favorable VGM Score B.
Reasons for the Bullish Run
Top-Line Prospects: Xylem reported better-than-expected revenues in fourth-quarter 2017. Revenues improved 7% year over year on an organic basis. From end-market’s perspective, sturdy public utility, commercial and residential demand bolstered revenues during the reported quarter. Xylem believes the improving Water Infrastructure, Applied Water and Measurement & Control Solutions segments’ performances will prove conducive to revenue growth.
Water Infrastructure results will gain from sturdier water transport and dewatering business. In addition, stronger industrial, commercial and residential applications businesses will improve the Applied Water segment’s performance. Moreover, Xylem believes solid analytics, gas, solutions, software and services business will reinforce performance of the Measurement & Control Solutions segment in the near term.
For 2018, the company anticipates to generate revenues in the range of $5.1-$5.2 billion (estimating organic revenue growth of 4-6%).
Margin Growth: Xylem’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin expanded 40 basis points (bps) in the fourth quarter 2017. The company noted that this upswing was primarily driven on the back of healthy performance of Sensus analytics business and ongoing productivity initiatives.
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Notably, the company realized $148 million cost savings and a remarkable amount of volume leverage from its productivity initiatives. The company expects to widen its EBITDA margin by 70-100 basis points and secure cost savings of $160 million in 2018.
Business Buyouts: Xylem perceives that strategic business acquisitions will boost its competency in the quarters ahead. The company successfully acquired Pure Technologies on Jan 31, 2018, in a bid to reinforce its progressive infrastructure analytics business. Xylem believes this buyout will open up new opportunities for its business and boost shareholders’ value as well.
Notably, the Pure Technologies acquisition is anticipated to drive the company’s revenues by 2% in 2018. Additionally, the buyout of premium stormwater and sewer analytics company — EmNet (January 2018) — is anticipated to fortify Xylem’s analytics business arm in the quarters ahead.
Liquidity: Xylem has been steadily boosting its free cash flow on the back of working capital improvements across all businesses and the robust Sensus business operating performance. In fourth-quarter 2017, the company’s free cash flow improved 58% year over year.
During the quarter, the company financed new capital expenditure programs, provided dividends and repaid debt with these proceeds. Xylem claims that better working capital management will continue to boost its liquidity over time.
Upward Estimate Revisions: Over the past 7 days, the Zacks Consensus Estimate for Xylem moved 3.6% upward to $2.91 and 4.3% to $3.36 for 2018 and 2019, respectively.
The positive earnings estimate revision indicates upbeat sentiments and substantiates the Zacks Rank #2 for this stock.
The stock’s projected earnings per share (EPS) growth rate for 2018 and 2019 is pegged at 20.4% and 15.2%, respectively.
Other Stocks to Consider
Some other top-ranked stocks in the same space are listed below:
Colfax Corp. (NYSE:CFX) currently sports a Zacks Rank #1 (Strong Buy). The company’s EPS is projected to be up 12.3% in the next three to five years. You can see .
Applied Industrial Technologies, Inc. (NYSE:AIT) carries a Zacks Rank #1. The company’s EPS is predicted to grow 12% over the next three to five years.
Dover Corp. (NYSE:DOV) sports a Zacks Rank #1. The company’s EPS is predicted to grow 13% during the same time frame.
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