Key takeaways:
Current Price: $128 Price Target: $139 NEW (from $130)
Position Size: 3.08% 1-year Performance: +71%
Xylem reported its 2Q 2021 earnings this morning, beating estimates on the top and bottom line, as demand was strong in all segments. Organic sales were up 11%, and leading indicators are showing good momentum: orders were up +29% and backlog +35%. EBITDA margin grew 200bps, as pricing, volume and mix added 330bps, offsetting part of COGS inflation (-370bps), and productivity efforts adding another +390bps. We are pleased to hear the company’s strong operating execution is yielding margin expansion, even with rising inflation and component shortages. The management team raised its full year guidance, but the raise implies lower growth in 2H21 vs. current consensus. We think this will lead sell-side analysts to raise their numbers and price targets for this name. We revised our price target to reflect faster recovery in end markets and greater margin upside potential. The next investor day will be held September 30th, when they will share some strategic update.
CEO quotes:
- M&A: “we still are going to be disciplined around returns and […] making sure margins are accretive. There’s a technology component we believe is very important that there is a services recurring revenue component that are very attractive.
- ESG: “ I’m very proud of what the entire team has done here on making sure that sustainability for us and the broader ESG is not just some kind of stand-alone thing. It’s deeply integrated into our business. It’s what we do as a company, and it’s in our operating processes”
Additional 1Q21 results:
Organic growth by end-markets:
- Utilities: +6%
- Industrial: +17%
- Commercial: +12%
- Residential: +29%
Organic growth by regions:
- US: +5%
- Emerging markets: +18%
- Western Europe: +17%
2021 guidance raised:
- Organic sales lifted from +5-7% to +6-8%
- Water Infrastructure up mid-single-digits
- Applied Water up low-double-digits
- Measurement & Control up mid-single-digits
- Adjusted EBITDA margin 17.2%-17.7%: cost savings benefits with favorable volume/price/mix, balanced by rising inflation, component shortages and prioritized growth investments
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
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109
