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Xylem (XYL) Displays Bright Prospects Amid Macro Headwinds


On Jan 8, we issued an updated research report on premium diversified machinery company Xylem Inc. XYL.

Over the last six months, this Zacks Rank #3 (Hold) stock yielded a return of 27.5%, outperforming 15.4% growth recorded by the industry.

Existing Scenario

Xylem believes that robust public utility sector demand as well as stronger industrial end-market business will drive its top-line growth in the quarters ahead. Moreover, elevated sales from residential and commercial end markets are anticipated to bolster its revenues. Notably, the company estimates organic revenues to grow in the range of 3-4% in the fourth quarter.

Moreover, Xylem aims to boost its financials on the back of diligent business acquisitions. In this context, the acquisition of Tideland Signal Corporation (February 2016), as well as Sensus and Visenti businesses (October 2016) are worth mentioning. Notably, considering the benefits of the Sensus and Visenti acquisition, Xylem anticipates organic revenue growth rate in the band of 4-6% by 2020. Also, the latest Pure Technologies buyout (December 2017) will likely drive the company’s results and smart water portfolio.

In addition, backed by the ongoing lean initiatives, Xylem intends to secure increased cost savings and offset the adverse impact of inflation in the near term. Notably, it intends to finance new research and development investments, and also offer increased returns to shareholders with increased liquidity.

However, Xylem’s business largely depends on third-party suppliers, as well as commodity and contract manufacturing market conditions. The company accrues different types of components, raw materials and input parts from these entities. If these third-party suppliers are unable to provide the required materials on time, then Xylem will face severe supply-chain challenges going forward.

Moreover, adverse climatic conditions, such as heavy floods and droughts, might give rise to operational challenges.

Greater internationalization exposes Xylem to political, environmental, economic and legal headwinds. For instance, adverse foreign currency translation impact reduced the company's earnings per share for the first nine months of 2017 by 2 cents. A stronger U.S. dollar enhanced the competitive power of smaller companies based in low-cost nations, thereby hurting Xylem's results. Notably, further appreciation of the U.S. currency is expected to dent the company's financials in the quarters ahead.

Stocks to Consider

Some better-ranked stocks in the same space are listed below:

Atlas Copco AB ATLKY currently carries a Zacks Rank #2 (Buy). The company’s earnings per share (EPS) are predicted to be up 12.50% in the next three to five years. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

EnPro Industries NPO also holds a Zacks Rank #2. The company’s EPS is projected to rise 15.50% over the next three to five years.

Illinois Tool Works Inc. ITW has a Zacks Rank #2, at present. The company’s EPS is estimated to be up 10.06% during the same time frame.

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