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Why Is Xylem (XYL) Down 6.4% Since Last Earnings Report?

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A month has gone by since the last earnings report for Xylem (XYL - Free Report) . Shares have lost about 6.4% 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 the most recent earnings report in order to get a better handle on the important drivers.

Xylem's Q2 Earnings & Revenues Beat Estimates

Xylem’s second-quarter 2022 adjusted earnings (excluding 4 cents from non-recurring items) of 66 cents per share, surpassed the Zacks Consensus Estimate of 55 cents. The bottom line was flat year over year.

Xylem’s revenues of $1,364 million also outperformed the Zacks Consensus Estimate of $1,304.3 million and inched up approximately 1% year over year. Organic sales in the quarter rose 6%, driven by higher global demand across its end markets coupled with record order and backlog across the portfolio.

Orders in the reported quarter increased 1% year over year to $1,684 million. Organically, orders grew 6% owing to robust demand.

Segmental Details

Revenues in the Water Infrastructure segment were $589 million, up 4% year over year. Organic sales in the reported quarter grew 9% year over year, buoyed by effective price realization and healthy activity in wastewater utility business in the U.S. and Western Europe.

The Applied Water segment generated revenues of $429 million in the second quarter, up 4% year over year. Organic sales increased 7% on a year-over-year basis. Segmental performance benefited from strong price realization and backlog execution in industrial and residential end markets, partly hurt by persistent supply-chain constraints in commercial buildings in the United States.

Quarterly revenues at the Measurement & Control Solutions segment were $346 million, down 6% year over year. Organic sales were down 2% year over year due to supply-chain issues related to chips.

Margin Profile

In the reported quarter, Xylem’s adjusted EBITDA was $226 million, down 3.4% from the year-ago quarter’s level. Margin in the quarter improved 240 basis points (bps) year over year to 21.4%. Strong price realization, volume and productivity savings aided performance, despite cost inflation and high investments.

Operating income was $146 million in the quarter under review, down 8.8% year over year. The operating margin deteriorated to 10.7% in the second quarter of 2022 from 11.8% in the year-ago quarter. Interest expenses in the reported quarter totaled $12 million, down from $21 million in the year-ago quarter.

In the second quarter, Xylem’s cost of sales increased 1.6% year over year to $844 million. Selling, general and administrative expenses increased 3.3% to $314 million. Research and development expenses were flat year over year at $53 million.

Balance Sheet and Cash Flow

Exiting the second quarter, Xylem had cash and cash equivalents of $1,113 million compared with $1,349 million at the end of December 2021. Long-term debt was $1,879 million at the end of the second quarter of 2022 compared with $2,440 million at the end of December 2021.

In the first six months of 2022, Xylem generated net cash of $32 million compared with $206 million in the year-ago period. Capital expenditure was $95 million, up 18.8% year over year. Free cash flow was -$63 million in the first half of 2022 compared with +$126 million in the year-ago quarter.

Shareholder-Friendly Policies

In the first half of 2022, Xylem paid out dividends worth $110 million, reflecting an increase of 7.8% year over year. The company also bought back shares worth $52 million in the same period, down 23.5% year over year.

Outlook

Owing to strong demand, price realization and gradual easing of supply-chain constraints, Xylem raised its adjusted earnings per share guidance for the full year. It now expects the metric to be in the range of $2.50 to $2.70 compared with $2.40 to $2.70 anticipated earlier. The mid-point of the guided range — $2.60 — lies above the Zacks Consensus Estimate of $2.52.

Xylem now anticipates full-year revenues to increase 3-5% on a reported basis and 8-10% on an organic basis compared with organic revenue growth and reported revenue increase of 4-6% and 1-3% estimated earlier.

For 2022, adjusted EBITDA margin is now expected to be 16.5-17% compared with 16-17% anticipated earlier. However, the company expects its full-year performance to be hurt by cost inflation and foreign-currency headwinds.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Xylem has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, 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 B. 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.


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