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Xylem’s (XYL) Growth Prospects Bright Despite Macro Risks

Zacks

On Sep 19, 2016, we issued an updated research report on premium diversified machinery company, Xylem Inc. XYL. The company boasts of unique engineering services widely used in different wastewater and water applications. Since its inception, Xylem has been successfully expanding the scale of its business across international markets like the Asia Pacific, Europe and the U.S. However, the company is currently facing certain headwinds that may partially limit its upside potential.

Bullish Factors

Xylem’s public utility sector’s business has been gaining strength over time. This improvement is largely attributable to rise in demand for its wastewater and water infrastructure services, especially in the U.S. Moreover, the company aims to drive its financials on the back of lucrative business acquisitions.

For instance, the Tideland Signal Corporation buyout in Feb 2016 is reinforcing the company’s sales in the coastal and ocean markets. Also, the deal to purchase Sensus, signed in August, is expected to boost Xylem’s aggregate earnings from 2017 onward.

Xylem constantly intends to grow its business on the back of increased backlogs, volumes, greater cost discipline and strategic initiatives for operational enhancement. Based on these positives, the company anticipates generating total revenues worth $3.7 billion in full-year 2016, with an estimated year-over-year organic sales growth of 2–3%.


Existing Issues

Weak prices of energy resources like oil are currently affecting the revenues generated by manufacturing and industrial companies such as Xylem. Choppy oil prices have been directly hurting the oil companies’ sales and, hence, significantly reducing the extent of Greenfield investments made within the sector. As a result, lower investments made by oil companies have depressed the sales generated by producers of heavy equipment, machinery parts and steel.

Moreover, greater globalization exposes Xylem to several political, environmental, economic and legal headwinds. Even so, each business segment of the company faces stiff competition within the industry. Extensive business rivalry increases the bargaining power of customers, exposing the company to risks of market share loss. The appreciating U.S. dollar is enhancing the competitive power of smaller companies operating in low-cost nations, thus increasing revenue and margin loss risks for Xylem.

Stocks to Consider

Xylem currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks within the industry include DXP Enterprises, Inc. DXPE, Gorman-Rupp Co. GRC and Nordson Corp. NDSN. All the three companies currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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