It has been about a month since the last earnings report for Xylem (XYL). Shares have added about 2.4% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.
Xylem Q4 Earnings & Revenues Beat, Dividend Hiked
Xylem fourth-quarter 2023 adjusted earnings of 99 cents per share surpassed the Zacks Consensus Estimate of 96 cents. However, the bottom line decreased 1% year over year.
Xylem’s revenues of $2.12 billion outperformed the Zacks Consensus Estimate of $2.06 billion. The top line jumped 41% year over year, driven by strong commercial and operational execution and resilient demand. Organic sales in the quarter rose 9%.
Orders in the reported quarter increased 42% year over year. Organically, orders were up 10%.
Segmental Details
From second-quarter 2023 onward, Xylem introduced a new segment, Integrated Solutions & Services, to include the results of Evoqua, which it acquired in May 2023. The segment reported revenues of $322 million in the fourth quarter.
Revenues in the Water Infrastructure segment totaled $871 million, up 30.4% year over year. The Zacks Consensus Estimate for Water Infrastructure segment revenues was $829 million. Organic sales in the reported quarter increased 9% year over year, buoyed by price realization and robust treatment demand globally.
The Applied Water segment generated revenues of $457 million in the quarter, flat year over year. The Zacks Consensus Estimate for segmental revenues was $458 million for the quarter. Organic sales were flat on a year-over-year basis. The segmental performance benefited from solid price realization and resilient industrial demand in emerging markets and Western Europe, offset by lower volume.
Quarterly revenues at the Measurement & Control Solutions segment totaled $468 million, up 22% year over year. This compares with the Zacks Consensus Estimate of $444 million. Organic sales were up 21% year over year due to solid metrology demand and backlog execution.
Margin Profile
In the reported quarter, Xylem’s adjusted EBITDA was $ 416 million, up 48% from the year-ago quarter’s level. The margin in the quarter improved to 19.6% compared with 18.7% in the year-ago period.
Operating income was $211 million in the quarter under review, indicating an increase of 7.1% from the year-ago reported figure. Operating margin deteriorated to 10% from 13.1% in the year-ago period.
Balance Sheet and Cash Flow
Exiting the fourth quarter, Xylem had cash and cash equivalents of $1.02 billion compared with $944 million at the end of December 2022. Long-term debt (net) was $2.3 billion at the end of 2023 compared with $1.9 billion at the end of December 2022.
In 2023, Xylem generated net cash of $ 837 million from operating activities compared with $596 million in 2022. Capital expenditure was $271 million, up 30.3% from the year-ago period. Free cash flow was $599 million in 2023 compared with $388 million in the year-ago period.
Rewards to Shareholders
In 2023, Xylem paid dividends of $299 million, up 37.8% year over year. The company also bought back shares worth $25 million in the same period compared with $52 million worth of shares repurchased in the year-ago period.
Dividend Hike
Xylem’s board announced a dividend hike of 9% to 36 cents per share (annually: $1.44). The first installment of the dividend is payable to shareholders on Mar 20, of record as of Feb 21.
2024 Guidance
Xylem now expects revenues of approximately $8.4-$8.5 billion for 2024. This indicates a year-over-year increase of 14-15% on a reported basis and around 3-5% on an organic basis.
Adjusted EBITDA margin is estimated to be approximately 19.4-19.9% for 2024, indicating an expansion of 50 to 100 basis points year over year. XYL expects adjusted earnings of $4.00-$4.20 per share compared with $3.78 reported in 2023. For the year, free cash flow conversion to net income is anticipated to be around 115%.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month.
VGM Scores
Currently, Xylem has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. 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 is part of the Zacks Manufacturing - General Industrial industry. Over the past month, Applied Industrial Technologies (AIT), a stock from the same industry, has gained 0.4%. The company reported its results for the quarter ended December 2023 more than a month ago.
Applied Industrial Technologies reported revenues of $1.08 billion in the last reported quarter, representing a year-over-year change of +1.6%. EPS of $2.24 for the same period compares with $2.05 a year ago.
For the current quarter, Applied Industrial Technologies is expected to post earnings of $2.38 per share, indicating no change from the year-ago quarter. The Zacks Consensus Estimate has changed +0.4% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #2 (Buy) for Applied Industrial Technologies. Also, the stock has a VGM Score of B.
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