Why Xylem (NYSE: XYL) Should Remain in Your Investment Plans

Author: Riley Hayes Updated: 09-18-2024 03:12 PM

Understanding Xylem's Growth Potential

Xylem Inc. (NYSE: XYL) is on track for significant growth in the near future, driven by its diverse business operations and strategic acquisitions that enhance its market position. The company's focus on shareholder value adds to its investment appeal.

Company Overview

Xylem operates as a comprehensive provider of water solutions globally. The company addresses the entire water process cycle, including collection, distribution, and returning water safely to the environment. XYL has a robust presence not only across the United States but also in various regions worldwide, including Europe and Asia Pacific. Over the past year, Xylem's share price increased by 40.4%, outperforming the industry's growth of 26.8%.

Key Factors for Retaining Xylem in Your Portfolio

Investors have compelling reasons to consider retaining Xylem stock in their portfolios, given the company's strengths and outlook.

Robust Business Performance

Xylem has demonstrated considerable growth across various business segments. The Measurement & Control Solutions ("M&CS") segment has shown substantial progress, driven primarily by increased demand for smart metering technology in the U.S. This segment recorded organic sales growth of 26% year-over-year, primarily fueled by the surge in smart metering demand.

Water Infrastructure Segment Growth

The Water Infrastructure segment is thriving on the back of a strong pipeline of capital projects in Western Europe and increasing public infrastructure initiatives in the U.S. The segment reported a year-over-year organic sales increase of 7% in its most recent quarter, benefiting from higher prices and widespread growth across applications and regions.

Expansion through Strategic Acquisitions

To further strengthen its market position, Xylem actively seeks acquisition opportunities. The company's recent acquisition of Evoqua, a provider of crucial water treatment solutions, adds approximately $265 million in revenue to Xylem in just the second quarter. This transaction not only enhances Xylem's capabilities in water technologies but is also expected to realize significant cost synergies in the coming years.

Commitment to Shareholder Value

Xylem has made a commendable commitment to rewarding its shareholders, reflected in its dividend and share buyback initiatives. In the first half of 2024, the company paid out $175 million in dividends, a remarkable 25.9% increase from the previous year. Additionally, Xylem executed share buybacks totaling $18 million during the same period. The company's announcement of a 9% dividend increase earlier this year signals a robust commitment to enhancing shareholder returns.

Challenges Facing Xylem

Despite its strong positions and promising outlook, Xylem faces several challenges that could impact its performance. The Applied Water segment has been grappling with headwinds from an overall economic slowdown, leading to a 5% decline in year-over-year revenues in the second quarter. The broader manufacturing industry’s contraction, evidenced by a 48.5% manufacturing index, indicates potential risks to demand for numerous industrial applications.

Cost Pressures

In addition to market challenges, Xylem is experiencing rising costs due to inflationary pressures. The cost of revenues jumped 26.1% year-over-year, driven by escalating raw material, labor, and overhead expenses. Selling, general, and administrative costs rose as well due to additional operational expenditures following the Evoqua acquisition, impacting profitability.

Alternative Investment Options

Investors may also want to consider other alternatives in the same industry. Companies like Flowserve Corporation, known for its reliable operations and recent earnings growth, carry a favorable ranking for potential investment. Similarly, Crane Company and Parker-Hannifin, both of which have shown strong earnings surprises and positive consensus estimates, could provide viable investment opportunities.

Frequently Asked Questions

What are the main growth drivers for Xylem Inc.?

Xylem's growth is primarily driven by advancements in water technology, increased capital projects, and strategic acquisitions like Evoqua.

How has Xylem impacted its shareholders?

Xylem has positively impacted shareholders through increased dividends, share buyback programs, and rising stock performance.

What challenges does Xylem currently face?

Major challenges include segmental weakness due to economic slowdowns, rising operational costs from inflation, and fluctuations in demand in the industrial sector.

Is Xylem a good investment?

While Xylem demonstrates strong growth potential and shareholder returns, prospective investors should weigh this against economic challenges and cost pressures.

What companies are competitors of Xylem?

Competitors include Flowserve Corporation, Crane Company, and Parker-Hannifin, which also operate in the water and industrial solutions sector.

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