Machinery Stocks

Xylem Inc Valuation – January 2016 Update $XYL

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – November 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Xylem Inc (XYL) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Xylem Inc. is engaged in the design, manufacturing, and application of engineered technologies for the water industry. The Company is an equipment and service provider for water and wastewater applications with a portfolio of products and services addressing the cycle of water, from collection, distribution and use to the return of water to the environment. The Company is an equipment and service provider in various application areas of the water equipment industry: transport, treatment, test, building services, industrial processing and irrigation. The Company’s water market brands, such as Bell & Gossett and Flygt. The Company sells its products in more than 150 countries through a distribution network consisting of direct sales force and independent channel partners. The Company has two business segments: Water Infrastructure (collection, distribution and return) and Applied Water (usage).

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Downloadable PDF version of this valuation:

ModernGraham Valuation of XYL

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $6,051,814,006 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.47 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 16133.33% Pass
6. Moderate PEmg Ratio PEmg < 20 20.93 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.07 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.47 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

XYL value chart January 2016

EPSmg $1.65
MG Growth Estimate 10.40%
MG Value $48.38
Opinion Undervalued
MG Value based on 3% Growth $23.93
MG Value based on 0% Growth $14.03
Market Implied Growth Rate 6.22%
Current Price $34.55
% of Intrinsic Value 71.42%

Xylem Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, the short dividend record, and the high PEmg and PB ratios.  The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.97 in 2011 to an estimated $1.65 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.22% annual earnings loss over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Xylem Inc (XYL)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

XYL charts January 2016

Net Current Asset Value (NCAV) -$3.22
Graham Number $21.60
PEmg 20.93
Current Ratio 2.47
PB Ratio 3.07
Dividend Yield 1.59%
Number of Consecutive Years of Dividend Growth 5

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Sep2015
Total Current Assets $2,017,000,000
Total Current Liabilities $815,000,000
Long-Term Debt $1,196,000,000
Total Assets $4,645,000,000
Intangible Assets $2,018,000,000
Total Liabilities $2,602,000,000
Shares Outstanding (Diluted Average) 181,600,000

Earnings Per Share History

Next Fiscal Year Estimate $1.82
Dec2014 $1.83
Dec2013 $1.22
Dec2012 $1.59
Dec2011 $1.50
Dec2010 $1.78

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.65
Dec2014 $1.57
Dec2013 $1.37
Dec2012 $1.29
Dec2011 $0.97
Dec2010 $0.59

Recommended Reading:

Other ModernGraham posts about the company

19 Best Stocks For Value Investors This Week – 8/29/15
Xylem Inc. Analysis – August 2015 Update $XYL
Xylem Inc. Quarterly Valuation – May 2015 $XYL
16 Companies in the Spotlight This Week – 5/24/14
Xylem Inc. May 2014 Quarterly Valuation $XYL

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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