Xylem (XYL) Up 0.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Xylem (XYL). Shares have added about 0.3% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Xylem due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Xylem Q1 Earnings Top Estimates, Supply Woes Hurt

Xylem reported better-than-expected results for first-quarter 2022. XYL’s earnings surpassed the Zacks Consensus Estimate by 11.9%, whereas sales beat the same by 3.7%.

Adjusted earnings in the quarter under review were 47 cents per share, surpassing the Zacks Consensus Estimate of 42 cents. However, the bottom line decreased 16.1% from the year-ago figure of 56 cents due to higher costs and expenses. Supply-chain woes were a spoilsport in the quarter.

Revenue Details

In the quarter under review, Xylem’s revenues were $1,272 million, reflecting an increase of 1% from the year-ago quarter’s figure. Organic sales in the quarter rose 4%, driven by higher global demand across its end markets coupled with record order and backlog across the portfolio.

Xylem’s revenues surpassed the Zacks Consensus Estimate of $1,227 million.

Orders in the reported quarter increased 12% year over year to $1,715 million. Organically, orders grew 14%.

Xylem reports net sales under three segments, namely Water Infrastructure, Applied Water, and Measurement & Control Solutions. The segmental information is briefly discussed below:

Revenues for the Water Infrastructure segment were $533 million, up 5% year over year. Organic sales in the reported quarter grew 8% year over year. Businesses in the dewatering and emerging markets flourished, while utilities were soft.

The Applied Water segment generated revenues of $425 million in the first quarter, up 8% year over year. Organic sales increased 10% on a year-over-year basis. Price realization and backlog execution were solid across the end markets.

Quarterly revenues of the Measurement & Control Solutions segment were $314 million, down 11% year over year. Organic sales were down 9% year over year due to supply-chain issues related to chips. The smart metering business was weak in the quarter.

Margin Profile

In the reported quarter, Xylem’s adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $181 million, decreasing 15.8% from the year-ago quarter’s level. Margin in the quarter decreased 290 basis points (bps) year over year to 14.2%. Cost inflation and investments adversely impacted the results. This was partially offset by productivity gains and favorable pricing.

Adjusted operating income was $75 million in the quarter under review, almost flat year over year. The operating margin decreased 140 bps to 15.9%. Interest expenses in the reported quarter totaled $13 million, down from $21 million in the year-ago quarter.

In the first quarter, Xylem’s cost of sales increased 5.1% year over year to $805 million. As a percentage of revenues, the metric represented 63.3% compared with 61% in the previous year. Selling, general and administrative expenses increased 1% to $304 million. Research and development expenses grew 4% to $52 million.

Balance Sheet and Cash Flow

Exiting the first quarter of 2022, Xylem had cash and cash equivalents of $1,117 million, decreasing 17.2% from $1,349 million at the end of the last reported quarter. Long-term debt balance declined 23% sequentially to $1,878 million.

In the first quarter, XYL did not make the repayment of any long-term debt.

In the first three months, Xylem used net cash of $81 million from operating activities compared with $26 million used in the previous year’s quarter. Capital expenditure was $49 million, up 24.6% year over year. Free cash outflow was $130 million compared with $65 million free cash outflow reported in the year-ago quarter.

Shareholder-Friendly Policies

In the first quarter of 2022, Xylem paid out dividends worth $55 million, reflecting an increase from $51 million distributed in first-quarter 2021. Share repurchased amounted to $51 million, down 23.9% year over year

Outlook

For 2022, Xylem expects organic revenue growth of 4-6% from the year-ago reported figure. Total revenues are predicted to be $5.25-$5.35 billion, suggesting an increase of 1-3% from the year-ago reported figure. Adjusted earnings per share for the year are anticipated to be $2.40-$2.70.

The adjusted EBITDA margin is expected to be 16-17%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Xylem has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Xylem has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Xylem belongs to the Zacks Manufacturing - General Industrial industry. Another stock from the same industry, Dover Corporation (DOV), has gained 0.2% over the past month. More than a month has passed since the company reported results for the quarter ended March 2022.

Dover Corporation reported revenues of $2.05 billion in the last reported quarter, representing a year-over-year change of +9.9%. EPS of $1.90 for the same period compares with $1.81 a year ago.

Dover Corporation is expected to post earnings of $2.10 per share for the current quarter, representing a year-over-year change of +1.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.1%.

Dover Corporation has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.

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