Xylem Displays Bright Prospects Amid Persistent Headwinds

On Aug 25, we issued an updated research report on Xylem Inc. XYL.

In the past three months, this Zacks Rank #3 (Hold) stock has returned 24.8% compared with the industry’s growth of 16.5%.

Present Scenario

Xylem is well-positioned to gain from its solid backlog, stemming from large contract wins. Also, going forward, the company is likely to benefit from new products, innovation, efforts to boost growth and focus on operational execution. Further, it seems to be working diligently to continue with its operations despite the uncertainties caused by the coronavirus outbreak.

Also, the company’s cost-control measures are likely to help it offset some financial stress. For 2020, it anticipates realizing structural cost savings of $70 million, while the same is expected to be $80 million in 2021. Also, the company’s operating margin is likely to be 11-11.5% in the third quarter of 2020, suggesting growth from 9.3% recorded in the second quarter.

In addition, Xylem’s healthy liquidity position adds to its strength. For instance, exiting the second quarter of 2020, it had a liquidity balance of $2.4 billion. This comprised of $1.6 billion of available cash and liquidity under credit facilities.

However, the pandemic-led market downturn has been posing challenges for its businesses in the near term.  For the third quarter, it currently expects a year-over-year organic sales decline of 8-12%, including sales declines across all its business segments.

Moreover, the company’s high-debt profile poses a concern. For instance, its long-term debt was $3,031 million at the end of the second quarter of 2020, reflecting an increase of 49.2% sequentially. Notably, proceeds from debt issuance totaled $987 million in the first half of 2020. Further, an increase in debt levels can raise the company’s financial obligations.

Key Picks

Some better-ranked companies from the same space are Chart Industries, Inc. GTLS, Altra Industrial Motion Corp. AIMC and Graco Inc. GGG. While Chart Industries currently sports a Zacks Rank #1 (Strong Buy), Altra Industrial and Graco carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chart Industries delivered an earnings surprise of 10.17%, on average, in the trailing four quarters.

Altra Industrial delivered an earnings surprise of 31.43%, on average, in the trailing four quarters.

Graco delivered an earnings surprise of 8.68%, on average, in the trailing four quarters.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.