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Xylem Inc. (XYL - Free Report) is witnessing growth across most of its businesses. The Measurement & Control Solutions (M&CS) segment is benefiting from the robust demand for advanced technology solutions like smart metering and other applications, primarily in the United States. The segment’s organic sales were up 26% year over year, driven by smart metering demand and execution.
Growth in the transport application business, driven by a strong pipeline of capital projects in Western Europe and increased infrastructure projects in the United States, is boosting the Water Infrastructure segment’s performance. Strong momentum in the treatment applications business, supported by increasing capital projects in emerging markets, also bodes well. The segment’s organic sales increased 7% year over year in the second quarter, buoyed by price realization and growth across all regions and applications.
Strength in dewatering business across major markets (particularly in the United States and emerging regions), driven by increased sales volume and favorable pricing, is a key catalyst to the Water Solutions and Services segment’s growth. The segment’s organic sales grew 12% year over year in the second quarter, supported by higher capital project revenues and gains in integrated solutions and services in the United States.
Xylem believes in acquiring businesses/assets to expand its product offerings. Acquisitions contributed $265 million to its total revenues in the second quarter. The company acquired mission-critical water treatment solutions and services provider, Evoqua, in May 2023. Evoqua’s advanced water and wastewater treatment capabilities and position in key industrial markets complement Xylem’s portfolio of solutions across the water cycle. The acquisition bolstered the company’s position in water technologies, solutions and services. The transaction is expected to deliver run-rate cost synergies of $140 million within three years upon closing. It is also expected to strengthen the balance sheet.
Xylem’s commitment to rewarding shareholders through dividends and share buybacks is encouraging. In the first six months of 2024, it paid dividends of $175 million, up 25.9% year over year. The company also bought back shares worth $18 million in the same period. In February 2024, it hiked its dividend by 9%. Also, in 2023, Xylem paid out dividends worth $299 million and bought back shares worth $25 million.
In the past year, this Zacks Rank #3 (Hold) company’s shares have gained 34.5% compared with the industry’s 22.4% growth.
Image Source: Zacks Investment Research
However, the company has been experiencing weakness in the Applied Water segment owing to the slowdown in the broader economy. In July 2024, the Institute for Supply Management’s manufacturing index registered 48.5%, indicating a contraction in U.S. manufacturing activity for the third consecutive month. The impact of this slowdown is reflected in the decrease in demand for industrial and building solutions applications, including pumps, valves, heat exchangers, controls and dispensing equipment. Amid these challenges, the segment’s second-quarter revenues declined 5% on a year-over-year basis. A reduced number of project wins may impact the segment’s performance in the near term.
Xylem has been grappling with the adverse impacts of cost inflation. In the second quarter of 2024, the company’s cost of revenues increased 26.1% year over year due to high raw material, labor, freight and overhead costs. Selling, general and administrative expenses increased 8.7% due to additional operational expenditure from the acquisition of Evoqua. Escalating costs pose a threat to the company’s bottom line.
Stocks to Consider
Better-ranked companies from the same space are discussed below.
FLS delivered a trailing four-quarter average earnings surprise of 18.2%. In the past 60 days, the Zacks Consensus Estimate for Flowserve’s 2024 earnings has increased 3.8%.
Crane Company (CR - Free Report) presently carries a Zacks Rank of 2. The company delivered a trailing four-quarter average earnings surprise of 11.2%.
In the past 60 days, the Zacks Consensus Estimate for CR’s 2024 earnings has increased 2%.
Ferguson Enterprises Inc. (FERG - Free Report) currently carries a Zacks Rank of 2. FERG delivered a trailing four-quarter average earnings surprise of 2.6%.
In the past 60 days, the consensus estimate for Ferguson’s fiscal 2025 earnings has remained steady.
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Xylem (XYL) Stock Boasts Strong Prospects Despite Headwinds
Xylem Inc. (XYL - Free Report) is witnessing growth across most of its businesses. The Measurement & Control Solutions (M&CS) segment is benefiting from the robust demand for advanced technology solutions like smart metering and other applications, primarily in the United States. The segment’s organic sales were up 26% year over year, driven by smart metering demand and execution.
Growth in the transport application business, driven by a strong pipeline of capital projects in Western Europe and increased infrastructure projects in the United States, is boosting the Water Infrastructure segment’s performance. Strong momentum in the treatment applications business, supported by increasing capital projects in emerging markets, also bodes well. The segment’s organic sales increased 7% year over year in the second quarter, buoyed by price realization and growth across all regions and applications.
Strength in dewatering business across major markets (particularly in the United States and emerging regions), driven by increased sales volume and favorable pricing, is a key catalyst to the Water Solutions and Services segment’s growth. The segment’s organic sales grew 12% year over year in the second quarter, supported by higher capital project revenues and gains in integrated solutions and services in the United States.
Xylem believes in acquiring businesses/assets to expand its product offerings. Acquisitions contributed $265 million to its total revenues in the second quarter. The company acquired mission-critical water treatment solutions and services provider, Evoqua, in May 2023. Evoqua’s advanced water and wastewater treatment capabilities and position in key industrial markets complement Xylem’s portfolio of solutions across the water cycle. The acquisition bolstered the company’s position in water technologies, solutions and services. The transaction is expected to deliver run-rate cost synergies of $140 million within three years upon closing. It is also expected to strengthen the balance sheet.
Xylem’s commitment to rewarding shareholders through dividends and share buybacks is encouraging. In the first six months of 2024, it paid dividends of $175 million, up 25.9% year over year. The company also bought back shares worth $18 million in the same period. In February 2024, it hiked its dividend by 9%. Also, in 2023, Xylem paid out dividends worth $299 million and bought back shares worth $25 million.
In the past year, this Zacks Rank #3 (Hold) company’s shares have gained 34.5% compared with the industry’s 22.4% growth.
Image Source: Zacks Investment Research
However, the company has been experiencing weakness in the Applied Water segment owing to the slowdown in the broader economy. In July 2024, the Institute for Supply Management’s manufacturing index registered 48.5%, indicating a contraction in U.S. manufacturing activity for the third consecutive month. The impact of this slowdown is reflected in the decrease in demand for industrial and building solutions applications, including pumps, valves, heat exchangers, controls and dispensing equipment. Amid these challenges, the segment’s second-quarter revenues declined 5% on a year-over-year basis. A reduced number of project wins may impact the segment’s performance in the near term.
Xylem has been grappling with the adverse impacts of cost inflation. In the second quarter of 2024, the company’s cost of revenues increased 26.1% year over year due to high raw material, labor, freight and overhead costs. Selling, general and administrative expenses increased 8.7% due to additional operational expenditure from the acquisition of Evoqua. Escalating costs pose a threat to the company’s bottom line.
Stocks to Consider
Better-ranked companies from the same space are discussed below.
Flowserve Corporation (FLS - Free Report) currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
FLS delivered a trailing four-quarter average earnings surprise of 18.2%. In the past 60 days, the Zacks Consensus Estimate for Flowserve’s 2024 earnings has increased 3.8%.
Crane Company (CR - Free Report) presently carries a Zacks Rank of 2. The company delivered a trailing four-quarter average earnings surprise of 11.2%.
In the past 60 days, the Zacks Consensus Estimate for CR’s 2024 earnings has increased 2%.
Ferguson Enterprises Inc. (FERG - Free Report) currently carries a Zacks Rank of 2. FERG delivered a trailing four-quarter average earnings surprise of 2.6%.
In the past 60 days, the consensus estimate for Ferguson’s fiscal 2025 earnings has remained steady.