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Xylem Inc. XYL has been benefiting from robust demand for metrology, water treatment, and integrated solutions across utilities, industrial and building solutions end markets. Exiting 2023, the company’s backlog totaled $5.1 billion, up 5% year over year, backed by strength across all regions. Strength in utilities, industrial and building solutions end markets are the key catalysts to the company’s growth. Xylem’s revenues increased 33% on a year-over-year basis in 2023.

The company remains focused on acquiring businesses to gain access to new customers, regions and product lines. For instance, in May 2023, XYL acquired Evoqua, a mission-critical water treatment solutions and services provider. Evoqua’s advanced water and wastewater treatment capabilities, and exposure to key industrial markets complement Xylem’s portfolio of solutions across the water cycle. The buyout is anticipated to deliver run-rate cost synergies of $140 million within three years of closing.

XYL remains committed on rewarding its shareholders through dividend payouts and share buybacks. In 2023, Xylem paid out dividends of $299 million, reflecting an increase of 37.8% year over year. It repurchased shares worth $25 million in the same year. Also, in February 2024, the company hiked its dividend rate by 9%.

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In the past three months, the Zacks Rank #3 (Hold) company has gained 20.8% compared with the industry’s 11.9% growth.

However, weakness in the residential building solutions market acts as a hindrance to the Applied Water segment’s growth. The segment witnessed a soft demand environment in developed markets, particularly in the United States, in fourth-quarter 2023. For 2024, Xylem expects the Applied Water segment’s total revenues to decline in low-single digits on a year-over-year basis.

XYL has been grappling with rising operating costs and expenses. In 2023, its cost of revenues increased 35.2% year over year, while selling, general and administrative expenses rose 43.2%. High raw material, labor, freight and overhead costs are pushing up the cost of sales. Escalating costs pose a threat to the company’s bottom line.

Key Picks

We have highlighted three better-ranked stocks from the same space, namely Flowserve Corporation FLS, Parker-Hannifin Corporation PH and Ingersoll-Rand plc IR, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Flowserve delivered a trailing four-quarter average earnings surprise of 29.3%. In the past 60 days, the Zacks Consensus Estimate for FLS’ 2024 earnings has increased 1.2%.

Parker-Hannifin delivered a trailing four-quarter average earnings surprise of 14.4%. In the past 60 days, the Zacks Consensus Estimate for PH’s 2024 earnings has increased 2.6%.

Ingersoll-Rand delivered a trailing four-quarter average earnings surprise of 15.9%. In the past 60 days, the Zacks Consensus Estimate for IR’s 2024 earnings has increased 1.6%.

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