Xylem Inc. (XYL), a leading global provider of water solutions, is poised for robust growth in the coming quarters. The company’s strong performance across its core businesses, coupled with strategic acquisitions, is creating a compelling investment opportunity. Xylem’s commitment to rewarding its shareholders through dividends and share buybacks further enhances its appeal.
Headquartered in Rye Brook, NY, Xylem operates across the full water-process cycle, including the collection, distribution, and return of water to the environment. The company has a strong global presence, with significant operations in the United States, Asia Pacific, Europe, and other key markets. Over the past year, Xylem has seen impressive growth, outperforming the industry by a significant margin.
Let’s delve into the factors that contribute to Xylem’s growth potential:
Business Strength:
Xylem is experiencing positive growth across most of its business segments. The Measurement & Control Solutions (M&CS) segment is benefitting from strong demand for advanced technology solutions like smart metering, particularly in the United States. This segment’s organic sales saw a robust 26% year-over-year increase, driven by smart metering demand. The Water Infrastructure segment is also experiencing growth due to a strong pipeline of capital projects in Western Europe and increased infrastructure projects in the United States. The Treatment Applications business within the Water Infrastructure segment is benefiting from increasing capital projects in emerging markets. This contributed to a 7% year-over-year increase in organic sales for the Water Infrastructure segment in the second quarter. The Water Solutions and Services segment is seeing growth driven by the dewatering business across major markets, particularly in the United States and emerging regions. 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.Expansion Efforts:
Xylem continues to solidify its product portfolio and capitalize on business opportunities through strategic acquisitions. In the second quarter, acquisitions contributed $265 million to the company’s total revenues. Notably, Xylem acquired Evoqua, a provider of mission-critical water treatment solutions and services, in May 2023. This acquisition bolstered Xylem’s position in water technologies, solutions, and services, adding Evoqua’s advanced water and wastewater treatment capabilities and its strong position in key industrial markets. The acquisition is expected to deliver run-rate cost synergies of $140 million within three years and further strengthen the company’s balance sheet.Rewards to Shareholders:
Xylem’s commitment to shareholder rewards is evident in its dividend payouts and share buybacks. In the first six months of 2024, the company paid dividends of $175 million, representing a 25.9% year-over-year increase. Xylem also bought back shares worth $18 million during the same period. In February 2024, the company increased its dividend by 9%. The company’s strong dividend record demonstrates its commitment to shareholder value.Challenges:
While Xylem is experiencing growth in many areas, it’s important to note some potential headwinds:Segmental Weakness:
The Applied Water segment has been facing challenges due to the slowdown in the broader economy. The decrease in demand for industrial and building solutions applications, including pumps, valves, heat exchangers, controls, and dispensing equipment, has negatively impacted the segment’s performance. In the second quarter, the segment’s revenues declined 5% year-over-year.Rising Costs:
Xylem has been grappling with rising costs due to inflation. In the second quarter, the cost of revenues increased 26.1% year-over-year due to higher raw material, labor, freight, and overhead costs. Selling, general, and administrative expenses also rose 8.7% due to additional operational expenditure from the Evoqua acquisition. Escalating costs pose a potential threat to the company’s bottom line.While Xylem faces some challenges, its strong business performance, strategic acquisitions, and commitment to shareholder rewards make it a compelling investment opportunity. However, investors should consider the potential impact of segmental weakness and rising costs on the company’s future performance.
