Finally Some Growth at Water Stock Pick Xylem

04/29/2014 5:00 pm EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

In a global economy where US and EuroZone governmental budget constraints have resulted in less spending on water projects, any sign of growth is good, such as that of this global water technology company, and MoneyShow's Jim Jubak is raising his target price as of today, April 29.

When Wall Street doesn’t expect much of any growth, a 3.1% year-to-year increase in revenue is reason for dancing in The Street.

That’s what’s happening with shares of Xylem (XYL) today. As of 3:00PM New York time, the stock was up 3.22%. The catalyst? First quarter earnings of 34 cents a share, 2 cents a share above analyst forecasts, that's 3.1% organic increase in revenue to $906 million (when Wall Street was expected $889 million), and earnings per share guidance of $1.85 to $2.00 a share for 2014 (when the Wall Street consensus was $1.87).

I added Xylem to my Jubak’s Picks Portfolio back on September 4, 2012 as a pure play on increasing global demand for clean water—and the equipment to purify and move it that Xylem makes. The stock is up 47.5% since then, but Xylem has had trouble getting much revenue growth in a global economy where tight government budgets in the United States and the EuroZone have slowed spending on water projects. Organic revenues have edged lower under that pressure so that investors (like myself) who like the long-term story have been left wondering when Xylem might see any growth at all.

Certainly, this quarter, positive as it is, doesn’t mark a huge turnaround. In its conference call, Xylem forecast that 2014 sales would grow by 2% to 4% even as it also noted that global water consumption is growing twice as fast as global population.

The company’s response to the current market softness has been to look for efficiencies that would improve margins. That seems to be working: in the just reported first quarter, adjusted operating margins climbed by 150 basis points.

As of April 29, I’m tweaking my current target price of $45 to $47 in recognition of Xylem’s progress on increasing operating margins. The stock pays as 1.4% dividend.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Xylem as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

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