It has been about a month since the last earnings report for Xylem (XYL Quick QuoteXYL - Free Report) . Shares have lost about 5.6% 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 its most recent earnings report in order to get a better handle on the important drivers.

Xylem Surpasses Q3 Earnings Estimates, Lowers View

Xylem reported mixed results for third-quarter 2021. Its earnings surpassed the Zacks Consensus Estimate by 6.78%. However, quarterly sales lagged estimates by 1.12%.

Adjusted earnings in the quarter under review were 63 cents per share, surpassing the Zacks Consensus Estimate of 59 cents. Also, the bottom line increased 1.6% from the year-ago figure of 62 cents on the back of higher sales generation, partially offset by weak margins. Supply-chain woes played spoilsport in the quarter.

Notably, movements in foreign currencies had a negative impact of 1 cent per share on earnings.

Revenue Details

In the quarter under review, Xylem’s revenues were $1,265 million, reflecting an increase of 3.7% from the year-ago quarter. Organic sales in the quarter increased 2% on the back of healthy demand in Water Infrastructure and Applied Water segments.

However, the company’s revenues lagged the Zacks Consensus Estimate of $1,279 million.

Orders in the reported quarter increased 22% year over year to $1,518 million. Organically, orders grew 20%.

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

Revenues for the Water Infrastructure segment were $547 million, up 4.4% year over year. Organic sales in the reported quarter grew 2% year over year. Businesses in both industrial and emerging markets flourished, while utilities were soft.

The Applied Water segment generated revenues of $400 million in the third quarter, up 9.9% year over year. Organic sales increased 8% on a year-over-year basis. Businesses in the commercial and industrial markets were healthy.

Quarterly revenues of the Measurement & Control Solutions segment were $318 million, down 4.2% year over year. Organic sales were down 5% year over year due to supply-chain issues related to chips. The smart metering business was weak in the quarter, partially offset by healthy pipeline assessment services and water quality testing applications businesses.

Margin Profile

In third-quarter 2021, Xylem’s cost of sales increased 4.5% year over year to $793 million. As a percentage of revenues, it represented 62.7% versus 62.2% in the year-ago quarter. Selling, general and administrative expenses increased 2.6% to $273 million. Meanwhile, research and development expenses grew 8.9% to $49 million.

In the reported quarter, the company’s adjusted earnings before interest, tax, depreciation and amortization were $227 million, increasing 2.3% from the year-ago quarter. Margin in the quarter decreased 30 basis points (bps) year over year to 17.9%. Cost inflation, investments and divestitures adversely impacted results. This was partially offset by productivity gains, volume leverage, favorable mix and pricing, and other tailwinds.

Adjusted operating income was $155 million in the quarter under review, down 1.9% year over year. The operating margin decreased 70 bps to 12.3%. Interest expenses in the reported quarter totaled $21 million, down from $22 million in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the third quarter of 2021, Xylem had cash and cash equivalents of $1,255 million, decreasing 31.8% from $1,840 million at the end of the last reported quarter. Long-term debt balance declined 0.2% sequentially to $2,455 million.

In the first three quarters of 2021, the company repaid debts of $600 million.

In the first nine months of 2021, it generated net cash of $318 million from operating activities, reflecting a decrease of 30% from the year-ago quarter. Capital expenditure was $127 million, down 6.6% year over year.

Shareholder-Friendly Policies

In the first nine months of 2021, the company paid out dividends of $152 million, reflecting an increase from $142 million distributed in the year-ago period. Share repurchased amounted to $68 million, up 11.5% year over year.

Outlook

Xylem expects demand to be healthy in fourth-quarter 2021, while predicts supply-chain restrictions to continue impacting its performance.

For 2021, the company decreased its organic revenue growth projection to 3-4% from the previously stated 6-8%. Total revenues are predicted to be $5.1-$5.2 billion, down from $5.3-$5.4 billion mentioned previously.

Adjusted earnings per share for the year are anticipated to be $2.40-$2.50, down from $2.55-$2.70 mentioned previously.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -13.1% due to these changes.

VGM Scores

Currently, Xylem has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Xylem has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.