Xylem (XYL) Faces Headwinds, Retains Scope for Growth - Analyst Blog

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On Feb 13, 2015, we issued an updated research report on the premium diversified machinery company, Xylem Inc. ( XYL ). The company provides non-imitable engineering services which find wide usage in different types of wastewater and water applications. Since its inception, Xylem has successfully expanded the scale of its business across international markets like Asia Pacific, Europe and the U.S. However, at present, the company is encountering risks from certain market headwinds.

Bearish Outcomes

Internal operational deficiencies such as delay in project deliveries, coupled with macro issues like an unfavorable mix and inflation, marginally lowered the top-line results of Xylem's Water Infrastructure segment. If the company fails to address these issues promptly, they might weigh on its revenues and margins in the upcoming quarters. Also, the company's international trade is exposed to threats of adverse macroeconomic conditions. For instance, political unrest in Europe has weakened Xylem's commercial buildings business in the last reported quarter. Further, due to unfavorable foreign currency fluctuations, Xylem lowered its revenue guidance for 2015. At the same time, growing demand for water solutions is steadily increasing the count of Xylem's market competitors, which in turn heightens the risk of market share loss for the company.

Scopes for Improvement

Amid the looming headwinds, Xylem's revenues and earnings in the fourth quarter of 2014 outpaced their respective Zacks Consensus Estimate. In our opinion, the improving U.S. economy, along with growing demand from certain emerging economies, is mitigating the problems at Xylem. The company is also attempting to improve its operating margin by implementing efficient cost-reduction strategies. These are expected to aid the bottom line, going forward.

With a market capitalization of $6.57 billion, Xylem currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include Kadant Inc. ( KAI ), Briggs & Stratton Corporation ( BGG ) and Bemis Company, Inc. ( BMS ). All three stocks currently hold a Zacks Rank #2 (Buy).

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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.

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

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