Xylem Earnings: Measurement and Control Solutions Maintains Strong Momentum

We’ve raised our fair value estimate for narrow-moat-rated Xylem XYL to $104 from $97 after the water technology firm posted solid second-quarter results and raised its full-year outlook for the second time this year. The fair value adjustment reflects the acquisition of Evoqua, our more optimistic near-term revenue growth projections, and time value of money.

Xylem grew its second-quarter organic revenue by 15% year over year, with double-digit growth across all segments and end markets. Compared with the prior-year period, organic revenue was up by 12% in applied water, 13% in water infrastructure, and 21% in measurement and control solutions. The measurement and control solutions segment continued to benefit from chip supply improvement, and volume leverage helped it deliver a 590-basis-point year-over-year adjusted EBITDA margin expansion, from 9.8% to 15.7%. The new integrated solutions and services segment grew its pro forma revenue by 12% year over year. Xylem expanded its second-quarter adjusted EBITDA margin by 250 basis points, from 16.6% to 19.1%, thanks to volume leverage, productivity, and a positive price-cost spread.

Xylem raised its guidance range for full-year 2023 and now anticipates adjusted EPS of $3.50-$3.70, up from $3.00-$3.25 previously. At the midpoint the revised outlook reflects a roughly $0.28 organic guidance increase and a $0.20 boost from the Evoqua acquisition. Management said on the call that it expects cost synergies from the acquisition to reach a run rate of around $40 million by the end of the year and $140 million within three years. We are encouraged by the continued strong momentum in measurement and control solutions. We think that the segment’s $2.4 billion backlog positions it well for continued growth and strong incremental margins in the second half of the year.