Morningstar | Xylem Posts Another Strong Quarter; Maintaining FVE
We maintain our $72 per share fair value estimate for Xylem, as the narrow-moat water treatment company delivered another strong quarter, posting a 16% year-over-year increase in adjusted EPS, which was in line with consensus estimates. Management announced a 14% increase in the quarterly dividend to $0.24 per share.Xylem generated $1.4 billion of revenue in the fourth quarter, a 9% year-over-year increase fueled by impressive 17% growth in the measurement and control solutions segment. The applied water segment grew sales 8% from the same period last year, while water infrastructure delivered 4% year-over-year growth.
Furthermore, full-year 2018 adjusted operating margin increased by 60 basis points to 13.7%, despite 270-basis-point cost inflation headwinds. Cost reductions had a positive 300-basis-point impact on operating margins, and we anticipate business simplification and footprint rationalization to drive further margin expansion over the next few years.
Management provided 2019 guidance that implies roughly 15% EPS growth at the midpoint. The company expects revenue to grow 4%-6% and adjusted operating margins to improve to approximately 15% in 2019. As the newly released guidance is in line with our prior expectations, we have not made any material changes in our forecast. We model 2019 EPS at $3.36.
We recently upgraded our moat trend rating to positive as we expect that increased research and development spending and strategic acquisitions will allow Xylem to offer utilities a more comprehensive and integrated solutions package (including pumps, smart meters, leak detection, as well as a communication network and data management platform), thus increasing switching costs. Our thesis remains intact as management indicated on the earnings call that new products continue to generate accretive margins and growth rates.
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.
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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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