Xylem Reports Strong Performance in Q3, Earnings Per Share Up 12%

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Xylem Reports Strong Performance in Q3, Earnings Per Share Up 12%

Leading global water technology company Xylem Inc. (XYL) reported a strong third-quarter performance during its earnings call. CEO Matthew Pine and CFO Bill Grogan presented a solid financial outlook with record EBITDA margins and a significant increase in earnings per share.

Despite facing challenges in the Measurement and Control Solutions (MCS) and Water Solutions and Services (WSS) segments, the company experienced slight organic revenue growth and saw an 8% increase in orders, indicating a substantial backlog. Xylem also announced strategic moves, including a plan to increase its stake in the Idrica joint venture and leadership changes in the Applied Water segment.

Key Points:

  • EBITDA margins reached a record high of 21.2%.
  • Earnings per share (EPS) increased by 12% year-over-year to $1.11.
  • Organic revenue grew by 1%, with orders up by 8%.
  • Full-year earnings guidance narrowed to between $4.22 and $4.24.
  • Revenue expectations of $8.5 billion were maintained, representing approximately 15% growth.
  • Xylem plans to increase its stake in the Idrica joint venture.
  • Meredith Emerick was appointed as the leader of the Applied Water segment.

Company Outlook:

  • Revenue growth of 2% to 3% is anticipated in Q4.
  • Expected EBITDA margins for Q4 are between 20.5% and 21%.
  • Long-term demand remains robust across segments.
  • Despite short-term pressures, the three-year growth outlook is between 4% and 6%.

Negative Highlights:

  • The industrial and commercial building sectors declined by 4%.
  • Challenges arose in Europe and Asia, particularly with moderate order declines in China.
  • A soft Q4 is expected, with recovery anticipated in early 2024.

Positive Highlights:

  • The utilities end market increased by 10%.
  • Positive order growth in four of the last five quarters for Applied Water.
  • Resilience in the water drainage business despite softness in mining applications.

Shortcomings:

  • Revenue growth was hindered by project timing delays in the MCS and WSS segments.
  • Timing challenges may affect normalized growth in MCS.

Q&A Highlights:

  • The company is optimistic about larger projects supporting a recovery in 2025.
  • Despite ongoing pressures from long-standing initiatives, the outlook for next year remains positive.
  • Specific guidance for the recovery timeline was not provided.

Xylem's earnings call revealed that the company is navigating a range of challenges and strategic advances. Despite facing headwinds in specific markets and segments, Xylem's leadership remains optimistic about the company’s long-term prospects and its ability to adapt to changing demands in the water industry. The commitment to strategic investments and leadership changes, such as increasing its stake in Idrica, indicates a focus on growth and innovation. With a strong backlog and positive order growth in key segments, Xylem appears well-positioned to maintain its trajectory of success into 2024 and beyond.

InvestingPro Insights: Xylem Inc.'s (XYL) robust third-quarter performance and optimistic outlook are further supported by data from InvestingPro. The company has a market capitalization of $29.88 billion, reflecting its significant presence in the water technology sector. Xylem's 38.64% revenue growth over the last twelve months and 25.96% quarterly revenue growth expected in Q2 2024 align with the reported organic revenue growth and increased orders.

InvestingPro highlights Xylem's financial stability and shareholder-friendly policies. The company has increased its dividend for 13 consecutive years, showcasing its commitment to returning value to shareholders. This is particularly notable in light of the record EBITDA margins and rising earnings per share reported by the company. Additionally, Xylem's cash flows sufficiently cover interest payments, supporting its ability to manage debt while investing in growth initiatives, such as increasing its stake in the Idrica joint venture.

While the company's P/E ratio of 38.8 may seem high at first glance, it stands at 31.58 when adjusted for the last twelve months as of Q2 2024. When combined with a PEG ratio of 0.6, this indicates that Xylem is trading at a reasonable valuation relative to its growth expectations. This is consistent with the company’s positive outlook and projected revenue growth for Q4 and beyond.

Investors evaluating Xylem should note that InvestingPro provides an additional 11 insights on this stock, offering a more comprehensive analysis of the company’s financial health and market position.