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Turning water into profit: what analysts are saying about Xylem Inc

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If you're looking to invest in a company that has the potential to deliver products and services that are in great demand amid rising concern for the environment, Xylem Inc (NYSE: XYL) should be high on your list.

Why Xylem?

The company is a US-based global water technology provider that develops innovative solutions to address the world's water problems. Xylem is a major player in water treatment, analysis, monitoring and distribution. The company's products and technology are widely used by public utilities, industrial, commercial as well as residential buildings.

xylem inc water shares

When Hurricane Sandy, one of the deadliest and most destructive hurricanes recorded in the US, hit the New York/New Jersey region in 2012, Xylem's industrial-strength water pumps were used to minimise the flood damage. Approximately 500 water pumps were distributed in strategic areas to move an enormous amount of water.

Around the world we appear to be seeing more frequent appearance of extreme weather events with drought and water scarcity on one hand and floods on the other. Xylem's technology plays an enormous role under these conditions and will continue to be in demand for the foreseeable future.

The water technology and management expertise of Xylem are in high demand not only during natural calamity situations. The company's products are used on a daily basis in areas such as clean water delivery, wastewater transport and treatment, water monitoring and analysis.

Xylem also develops and provides smart metering, network technology and advanced infrastructure analytics for water, electric and gas distribution companies.

Listed on the New York Stock Exchange (NYSE) in October 2011, Xylem operates three key business segments:

  • Water Infrastructure - consists of its portfolio of businesses serving clean water delivery, wastewater transport and treatment, and dewatering
  • Applied Water - consists of businesses in residential and commercial building services and industrial applications
  • Measurement and Control Solutions - consists of businesses in smart metering, network technologies, advanced infrastructure analytics and analytic instrumentation.

Turning water into profit

Given its leading position in the water treatment and processing industry, Xylem has enjoyed a healthy growth trajectory and sustained upward momentum over the years.

During its 4th quarter 2019 reporting season (early February), Xylem reported:

  • Full-year 2019 reported net income of US$401 million or US$2.21 per share
  • Full-year free cash flow conversion was 124%
  • Fourth-quarter 2019 reported net income was US$118 million or $0.65 per share
  • An 8% increase in cash dividend, representing the company's ninth consecutive annual dividend increase
  • 2020 organic revenue growth guidance range of 1% to 3%
  • Adjusted earnings per share range of US$2.96 to US$3.16

In an interview during the release of the company's financial results, Xylem CEO Patrick Decker was quoted saying: "We continued to capitalise on our portfolio of industry-leading technologies throughout 2019, again delivering mid-single-digit growth in the utility market globally."

However, he said softer demand from industrial and commercial markets in the second half of 2019 slowed the company's overall full-year growth. But in response to that challenge, he said Xylem managed to contain their costs and significantly improved their working capital.

"We're confident as we enter 2020 with strong operational discipline and solid foundations underpinning continued growth," Mr Decker said.

What are analysts saying about Xylem?

A recent survey of market analysts covering the water treatment industry showed that during the last months, more analysts have upgraded their rating for Xylem. Five analysts gave the Xylem Inc. a buy rating, two of the polled analysts branded the stock as an overweight, nine analysts were recommending to hold the stock.

Institutional investors buying into Xylem

Recent share purchase records showed that a number of large institutional buyers have added to their holdings of Xylem shares. Some recent institutional investors include DWS Investment GMBH, Quilter Cheviot Ltd and Pictet Asset Management.

Share price performance

If you invested $US10,000 when Xylem listed in October 2011 at US$23.50 per share, your holding would have been worth about US$37,880 when the share price closed at a record high of US$89.13 on February 12, 2020.

Along with many other stocks around the world, Xylem endured a steep corrective pullback in late 2018. However, a strong start to 2019 saw prices move to new highs before settling into a 10-month choppy consolidation band between US$73 and US$85. Although the late February retreat from record highs around the US$89 region has seen prices slip back into the upper end of the previous consolidation band, we currently view this as another corrective move with the underlying upward trend remaining intact.

Conclusion

Given the world's continuing demand for clean, fresh potable water and Xylem's leading technologies and innovative products plus its global presence, we consider it a buy.

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Alex Douglas is managing director of Monex Securities Australia (AFSL 363 972), and is responsible for the overall growth of Monex in this region. He has held senior executive positions with numerous financial services companies both in Australia and Asia over the past three decades. Early roles in the industry included being a foreign exchange voice broker, a trader on the floor of the Sydney Futures Exchange and a senior analyst with Standard & Poor's in Singapore.  Alex is a Certified Financial Technician (CFTe) and former board member of the International Federation of Technical Analysts (IFTA) as well as a sought-after author, speaker and market commentator.
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