Xylem Inc. (XYL) is a leading global water technology company dedicated to solving the world’s most challenging water issues, notes John Eade, equity analyst with Argus Research, a leading independent Wall Street research firm.
It provides efficient, innovative and sustainable water technologies that improve the way water is used, managed, conserved and re-used. The company provides its water technology to public utility, residential, commercial, agricultural and industrial settings.
This well-managed company has a long record of market outperformance and dividend growth. We think the company is well positioned for the future and we forecast double-digit growth for the next two years. The company has a clean balance sheet and an experienced management team.
Xylem recently reported 2Q adjusted EPS that rose 144% year-over-year to $0.66, topping expectations by $0.04. Organic revenue rose 11% (16% overall) to $1.35 billion. The adjusted EBITDA margin widened by 200 basis points to 17.3%. For the first half, the company has earned $1.22 per share on an adjusted basis.
Along with the 2Q results, management once again raised guidance. The company now expects full year organic revenue growth of 6%-8% (9%-11% on a reported basis).
We are raising our 2021 adjusted EPS estimate from $2.70 to $2.72. Our estimate is just above the high end of management’s target range and implies earnings growth of 32% from last year’s adjusted EPS of $2.06. We expect growth to continue in 2022 and are raising our preliminary adjusted EPS estimate of $3.40 to $3.45.
We think that XYL shares are attractively valued at recent prices near $128. The shares are trading at the high end of the 52-week range of $77-$129. From a technical standpoint, the shares have been in a bullish pattern of higher highs and higher lows that dates to May 2020.
On a fundamental basis, the shares are trading at 37-times our 2022 estimate, near the midpoint of the historical range of 20-45.
Compared to the peer group, the shares are trading at the peer average P/E multiple, below the peer average P/S multiple and offer a higher-than-average yield. We think these metrics point to undervaluation, given the company’s strong balance sheet and growth outlook.
Our dividend discount model renders a 12-month target above $160. Blending our approaches, we arrive at a target price of $150 per share. We continue to rate the stock as a "buy".
