Key takeaways:
Current Price: $90 Price Target: $114 NEW
Position Size: 2.63% 1-year Performance: -8%
Xylem reported its 4Q 2021 earnings yesterday. Organic revenue declined 3% due to delays from supply chain impacting the Utilities end market. Organic orders were up +23% and backlog up +55%. On the margin front, inflation had a 560bps negative impact, while productivity added 310bps and pricing +200bps. The global chip shortage will continue to impact their business, especially the highest margin digital products business (microcontrollers – difficult to substitute), which is embedded in their 2022 outlook. Their secured chip supply is only 50% of current needs, but we should expect this to improve to 75% as we move through the year. So far Xylem has not experienced cancelled orders due to delay delivery, and end-markets demand remains healthy. A sign that the management team sees this disruption as temporary is the increase of their dividend by 7%. While we understand why the stock traded down on the soft (and prudent) guidance, we don’t think the long-term story has changed, and we like having exposure to the “clean water” theme in our portfolio. We reduced the price target a bit to account for risks in the supply chain/chip recovery timing.
Organic growth by end-markets:
- Utilities: -9%
- Industrial: +7%
- Commercial: +1%
- Residential: -4%
Organic growth by regions:
- US: -5%
- Emerging markets: flat
- Western Europe: +1%
2022 initial guidance:
- Organic sales +3-5%
- Water Infrastructure up mid-single digits
- Applied Water up mid-single digits
- Measurement & Control flat
- Adjusted EBITDA margin -100bps to flat
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
