Xylem Inc. XYL is well-poised for growth in the coming quarters, courtesy of its businesses and accretive acquisitions. The company’s efforts to reward its shareholders add to its appeal.

Headquartered in Rye Brook, NY, Xylem is one of the leading providers of water solutions worldwide. It is involved in the full water-process cycle, including the collection, distribution and return of water to the environment. XYL has a significant presence in the United States, the Asia Pacific, Europe and various other nations. Over the past year, this Zacks Rank #3 (Hold) company has gained 40.4% compared with the industry’s 26.8% growth.

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Let’s discuss the factors that might influence investors to retain this stock in their portfolio for the time being.

Business Strength: Xylem is seeing growth across most of its businesses. The Measurement & Control Solutions (“M&CS”) segment is benefiting from robust demand for advanced technology solutions like smart metering and other applications, primarily in the United States. The segment’s organic sales were up 26% year over year, driven by smart metering demand and execution.

Growth in the transport application business, driven by a strong pipeline of capital projects in Western Europe and increased infrastructure projects in the United States, is boosting the Water Infrastructure segment’s performance. Strong momentum in the treatment applications business, supported by increasing capital projects in emerging markets, also bodes well. The segment’s organic sales increased 7% year over year in the second quarter, buoyed by price realization and growth across all regions and applications.

Strength in dewatering business across major markets (particularly in the United States and emerging regions), driven by increased sales volume and favorable pricing, is a key catalyst to the Water Solutions and Services segment’s growth. The segment’s organic sales grew 12% year over year in the second quarter, supported by higher capital project revenues and gains in integrated solutions and services in the United States.

Expansion Efforts: The company solidifies its product portfolio and leverages business opportunities through asset additions. Acquisitions contributed $265 million to Xylem’s total revenues in the second quarter. The company acquired mission-critical water treatment solutions and services provider Evoqua in May 2023.

Evoqua’s advanced water and wastewater treatment capabilities and position in key industrial markets complement Xylem’s portfolio of solutions across the water cycle. The acquisition boosted its position in water technologies, solutions and services. The transaction is expected to deliver run-rate cost synergies of $140 million within three years upon closing. It is also expected to strengthen the company’s balance sheet.

Rewards to Shareholders: Xylem’s commitment to rewarding shareholders through dividends and share buybacks is encouraging. In the first six months of 2024, it paid dividends of $175 million, up 25.9% year over year. The company also bought back shares worth $18 million in the same period. In February 2024, it hiked its dividend by 9%. Also, in 2023, Xylem paid out dividends worth $299 million and bought back shares worth $25 million.

Downsides of Xylem

Segmental Weakness: Xylem has been experiencing weakness in the Applied Water segment owing to the slowdown in the broader economy. In July 2024, the Institute for Supply Management’s manufacturing index registered 48.5%, indicating a contraction in U.S. manufacturing activity for the third consecutive month. The impact of this slowdown is reflected in the decrease in demand for industrial and building solutions applications, including pumps, valves, heat exchangers, controls and dispensing equipment.

Amid these challenges, the segment’s second-quarter revenues declined 5% on a year-over-year basis in the second quarter. A reduced number of project wins is likely to impact its performance in the near term.

Rising Costs: Xylem has been grappling with the adverse impacts of cost inflation. In the second quarter, its cost of revenues increased 26.1% year over year due to high raw material, labor, freight and overhead costs. Selling, general and administrative expenses rose 8.7% due to additional operational expenditure from the acquisition of Evoqua. Escalating costs pose a threat to the bottom line.

Stocks to Consider

Some better-ranked companies from the same space are discussed below.

Flowserve Corporation currently carries a Zacks Rank #2 (Buy).

FLS delivered a trailing four-quarter average earnings surprise of 18.2%. In the past 60 days, the Zacks Consensus Estimate for Flowserve’s 2024 earnings has increased 3.8%.

Crane Company presently carries a Zacks Rank of 2. The company delivered a trailing four-quarter average earnings surprise of 11.2%.

In the past 60 days, the Zacks Consensus Estimate for CR’s 2024 earnings has increased 2%.

Parker-Hannifin Corporation currently carries a Zacks Rank of 2. PH delivered a trailing four-quarter average earnings surprise of 2.6%.

In the past 60 days, the consensus estimate for Parker-Hannifin’s fiscal 2025 earnings has increased 1.3%.

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