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Xylem (XYL) Exhibits Strong Prospects Despite Headwinds

Xylem Inc. XYL is benefiting from strong backlogs, owing to underlying demand. Also, due to the essential nature of the business, the company’s demand remains robust. Pricing actions to mitigate cost inflation are supporting the bottom line. Solid global demand across end markets also bodes well for the company.

Effective price realization and strength in both utility and industrial end markets are supporting XYL’s Water Infrastructure segment. The Applied Water segment is gaining from commercial and industrial end markets. Measurement & Control Solutions is benefiting from a robust utility end market, primarily in the United States, due to strong backlog execution. Also, strong price realization and improvement in chip supply bode well.

Xylem’s efforts to reward its shareholders through dividend payments and share repurchases are noteworthy. In 2022, Xylem paid out dividends worth $217 million, up 6.9% year over year. In the first three months of 2023, it paid out dividends worth $60 million, up 9.1% year over year. The company bought back shares worth $52 million in 2022 and $8 million in the first three months of 2023. In February 2023, the company hiked its dividend by 10%.

However, Xylem has been experiencing adverse impacts of cost inflation for a while. In the first three months of 2023, the company’s cost of revenues increased 12.1% year over year, while selling, general and administrative expenses rose 16.5%. High raw material, labor, freight and overhead costs are pushing up the costs of sales. Escalating costs pose a threat to the company’s bottom line. Additionally, higher strategic investments might dent margin performance.

XYL’s extensive presence across international markets and its operations are subject to risks associated with unfavorable movement in foreign currencies and geopolitical issues. For 2023, the company expects a 5% decrease in currency rate, which might impact revenues by $150 million and earnings by 16 cents per share.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

In the past year, this current Zacks Rank #3 (Hold) stock has surged 27.9, compared with the industry’s 15.3% increase.

Stocks to Consider

Here we have highlighted some top-ranked companies from the Industrial Products sector.

Ingersoll Rand Inc. IR presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks.

IR delivered a trailing four-quarter earnings surprise of 12.6%, on average. In the past 60 days, estimates for Ingersoll Rand’s 2023 earnings have increased 6%. The stock has improved 33.4% in the past year.

Alamo Group Inc. ALG presently sports a Zacks Rank of 1. ALG delivered a trailing four-quarter earnings surprise of 17.7%, on average.

In the past 60 days, estimates for Alamo’s 2023 earnings have increased 12.7%. The stock has gained 61.5% in the past year.

Parker-Hannifin Corporation PH presently carries a Zacks Rank #2 (Buy). PH delivered a trailing four-quarter earnings surprise of 12.4%, on average.

In the past 60 days, estimates for Parker-Hannifin’s fiscal 2023 (ending June 2023) earnings have increased 5.8%. The stock has increased 29.5% in the past year.

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Xylem Inc. (XYL) : Free Stock Analysis Report

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