Machinery Stocks

Xylem Inc Valuation – January 2017 $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 Stocks for Using A Benjamin Graham Value Investing Strategy – December 2016.  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 has two business segments, which include Water Infrastructure (collection, distribution, return) and Applied Water (usage). The Water Infrastructure segment focuses on the transportation, treatment and testing of water, offering a range of products, including water and wastewater pumps, treatment and testing equipment, and controls and systems. The Company’s Applied Water segment serves the primary uses of water and focuses on the residential, commercial, industrial and agricultural markets. The Company’s brands include Flygt, Wedeco, Godwin, Lowara, Flojet and Flowtronex.

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of XYL – January 2017

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 $8,821,549,392 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.49 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 18300.00% Pass
6. Moderate PEmg Ratio PEmg < 20 28.49 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.01 Fail
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 2.49 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.92 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

EPSmg $1.74
MG Growth Estimate 5.30%
MG Value $33.22
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $25.23
MG Value based on 0% Growth $14.79
Market Implied Growth Rate 10.00%
Current Price $49.58
% of Intrinsic Value 149.26%

Xylem Inc is suitable 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 poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.29 in 2012 to an estimated $1.74 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 10% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Xylem Inc revealed the company was trading above its Graham Number of $22.55. The company pays a dividend of $0.61 per share, for a yield of 1.2% Its PEmg (price over earnings per share – ModernGraham) was 28.49, which was above the industry average of 22.25. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-2.55.

Xylem Inc receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$2.55
Graham Number $22.55
PEmg 28.49
Current Ratio 2.49
PB Ratio 4.01
Current Dividend $0.61
Dividend Yield 1.22%
Number of Consecutive Years of Dividend Growth 6

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Total Current Assets $2,092,000,000
Total Current Liabilities $841,000,000
Long-Term Debt $1,148,000,000
Total Assets $4,778,000,000
Intangible Assets $2,065,000,000
Total Liabilities $2,551,000,000
Shares Outstanding (Diluted Average) 180,300,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.82
Dec2015 $1.87
Dec2014 $1.83
Dec2013 $1.22
Dec2012 $1.59
Dec2011 $1.50
Dec2010 $1.78

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.74
Dec2015 $1.67
Dec2014 $1.57
Dec2013 $1.37
Dec2012 $1.29
Dec2011 $0.97
Dec2010 $0.59

Recommended Reading:

Other ModernGraham posts about the company

18 Best Stocks For Value Investors This Week – 1/30/16
Xylem Inc Valuation – January 2016 Update $XYL
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

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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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