Company ProfileÂ (excerpt from Reuters): Xylem Inc., incorporated on May 4, 2011, is a water technology company. The Company designs, manufactures and services engineered solutions across a range of critical applications. 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 three business segments: Water Infrastructure, Applied Water and Sensus. The Company’s portfolio of solutions addresses customer needs across the water cycle, from the delivery and use of drinking water to the collection and treatment of wastewater to the return of water to the environment. The Company’s applications in the areas of water equipment industry include transport, treatment, test, building services, industrial processing and irrigation. The Company sells its products in various countries through a distribution network consisting of direct sales force and independent channel partners.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$12,472,821,206||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.42||Fail|
|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||83.84%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||33.92||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||5.00||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||1.42||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||3.68||Fail|
|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
|MG Growth Estimate||4.71%|
|MG Value based on 3% Growth||$29.96|
|MG Value based on 0% Growth||$17.56|
|Market Implied Growth Rate||12.71%|
|% of Intrinsic Value||189.21%|
Xylem Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.57 in 2014 to an estimated $2.07 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 12.71% 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 $29.34. The company pays a dividend of $0.72 per share, for a yield of 1% Its PEmg (price over earnings per share – ModernGraham) was 33.92, which was above the industry average of 28.03. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-15.12.
Xylem Inc scores quite poorly in the ModernGraham grading system, with an overall grade of F.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$15.12|
|Number of Consecutive Years of Dividend Growth||7|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||3/1/2018|
|Total Current Assets||$2,066,000,000|
|Total Current Liabilities||$1,460,000,000|
|Shares Outstanding (Diluted Average)||181,400,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.75|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$2.07|
Other ModernGraham posts about the company
|Xylem Inc Valuation â€“ January 2017 $XYL|
|Xylem Inc Valuation â€“ August 2016 $XYL|
|18 Best Stocks For Value Investors This Week â€“ 1/30/16|
|Xylem Inc Valuation â€“ January 2016 Update $XYL|
|19 Best Stocks For Value Investors This Week â€“ 8/29/15|
Other ModernGraham posts about related companies
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.