Key takeaways:
Current Price: $98 Price Target: $117
Position Size: 2.79% Performance: +49% (since inception on 04/07/20)
Xylem reported its 4Q 2020 earnings this morning, with sequential improvements in all of its markets. Sales came better than previously guided (-2% on an organic basis vs. -8% to -6%), as demand is stabilizing. The US continuous to have some softness due to Covid, and the delay in projects deployments. New projects have been temporarily delayed due to site access restrictions, which should ease towards the end of Q2. Their analytical and advanced solutions businesses saw high single digits growth and partly offset the decline in new projects starts. Total backlog is up 16% on an organic basis, which is encouraging for the upcoming quarters.
On the profitability side, productivity improvements of 520bps only partially offset some of the negative effects of lower volume (-390bps) and cost inflation (-250bps), but margin still came above guidance. So while top line was below 2019 levels, the company saw overall FCF grow 5% over the prior year, thanks to multiple years of efforts to improve its working capital. On the capital allocation front, dividend was raised by 8%.
CEO quote:
- “backlog in our advanced digital solutions grew 70% year-on-year. Although it’s from a small base, the trajectory is clear. It puts us in a very attractive position as we grow not only in software platforms but in all will be digitally enabled parts of our portfolio”
- “Short-cycle orders and project activity are definitely beginning to pick-up but are still likely to be limited by COVID impacts in the near term.”
Additional 4Q20 results:
Organic growth by end-markets:
- Utilities: -3%
- Industrial: -3%
- Commercial: flat
- Residential: +15%
Organic growth by regions:
- US: -6%
- Emerging markets: -2%, with China leading at +18%
- Western Europe: +6%
Xylem provided its initial 2021 guidance, which we believe is conservative due to the continued Covid environment:
- Organic sales of +3% to +5% (and for 1Q 2021 should be 1% to 3%)
- Adjusted operating margin between 11.5% and 12.5% – still below 2019 level, mostly due to mix: lower margin business recovering faster than higher margin one
- The order trends appears to be recovering, and backlog growth is significant (+16%).
Xylem’s investment thesis is:
- Xylem has strong sustainable secular growth drivers in a fragmented industry:
- Access to clean water is a necessity
- Population growth & urbanization
- Aging infrastructure
- More defensive sales base thanks to:
- 50% of sales to utility sector
- sticky client base due to high switching costs
- high level of replacement parts demand
- Long-term contracts with ½ of the revenue base recurring
- Margin expansion overtime from productivity efforts
- M&A strategy has increased their scope in the water cycle
- Valuation is attractive today
XYL.US
Category: earnings
Tag: XYL
