Xylem: Maintaining Standard Capital Allocation Rating After Leadership Succession Announcement

We are maintaining our $104 fair value estimate and Standard capital allocation rating for Xylem XYL after the company announced its leadership succession plan. Matthew Pine, the firm’s current chief operating officer, will take the helm as chief executive officer on Jan. 1, 2024, while William Grogan, former chief financial officer of Idex, will succeed Sandra Rowland as CFO on Oct. 1, 2023.

The timing of current CEO Patrick Decker’s retirement announcement came as a surprise to us, given the recent closing of the Evoqua acquisition. The new management team will now have to oversee the integration and deliver the targeted cost synergies from the Evoqua deal. Furthermore, we think that management will have to focus on delivering profitable growth in the measurement and control solutions segment, which faced headwinds in recent years due to the COVID-19 pandemic, as well as chip supply constraints, but now has strong momentum thanks to an improvement in chip supply.

We see no reason to change our Standard capital allocation rating for now, as we believe that Xylem remains in capable hands. We think that Pine is a natural successor as the role of COO was newly created for him in 2022 to focus on driving revenue growth and margin expansion. We also view the appointment of Grogan favorably. During his tenure as CFO of Idex, we assigned Idex an Exemplary capital allocation rating based on the firm’s strong record of M&A and driving margin expansion, so we think that Grogan will be a valuable addition to Xylem’s management team.

In conjunction with the announcement, Xylem also reiterated its third-quarter and full-year 2023 guidance.