Morningstar | No Surprises in 3Q for Xylem; We Maintain FVE. See Updated Analyst Note from 30 Oct 2018
We are maintaining our $64 fair value estimate for narrow-moat Xylem after the company reported third-quarter earnings that were roughly in line with our expectations. Management’s updated full-year 2018 earnings per share guidance of approximately $2.88 is also consistent with our prior projections.Xylem turned in another solid quarter, growing revenue by 8% year over year, with all three segments contributing. Measurement & control solutions delivered the fastest growth as sales increased by 15% compared with the prior-year period. Water infrastructure and applied water sales grew 4% and 7%, respectively. The company’s performance in emerging markets fueled revenue growth, as sales increased by 23% in China and 20% in Latin America.
In addition to strong revenue growth, Xylem improved its operating margin by 70 basis points year over year to 14.6% despite slight inflationary pressures and foreign exchange headwinds. We believe the company’s narrow moat will allow it to withstand these incremental headwinds and continue to deliver solid operating margins.
Management announced that revenue synergies from the acquisition of Sensus in late 2016 have reached $100 million, which we view as encouraging. Nevertheless, nothing in the third-quarter earnings release alters our long-term view of the company. We are maintaining our narrow moat rating and $64 fair value estimate, and we believe that shares are currently fairly valued.
Xylem is water technology company. The company designs, manufactures and services engineered solutions ranging across a variety of applications primarily in the water sector, but also in electric and gas. The company's business segments are: water infrastructure, which serves the water infrastructure sector with pump systems, filtration, ultraviolet and ozone systems and pumping solutions; Applied Water, which serves the usage applications sector with water pressure boosting systems; and Measurement and Control Solutions, which serves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control technologies and infrastructure technologies.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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