Machinery Stocks

Xylem Inc Valuation – February 2019 $XYL

Company Profile (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:

ModernGraham Valuation of XYL – February 2019

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 $13,552,661,042 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.51 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
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 67.57% Pass
6. Moderate PEmg Ratio PEmg < 20 29.53 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.91 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 1.51 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.91 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

EPSmg $2.56
MG Growth Estimate 8.02%
MG Value $62.78
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $37.10
MG Value based on 0% Growth $21.75
Market Implied Growth Rate 10.52%
Current Price $75.57
% of Intrinsic Value 120.37%

Xylem Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. 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 $1.67 in 2015 to an estimated $2.56 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.52% 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 $33.3. The company pays a dividend of $0.84 per share, for a yield of 1.1% Its PEmg (price over earnings per share – ModernGraham) was 29.53, which was above the industry average of 24.89. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-12.98.

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) -$12.98
Graham Number $33.30
PEmg 29.53
Current Ratio 1.51
PB Ratio 4.91
Current Dividend $0.84
Dividend Yield 1.11%
Number of Consecutive Years of Dividend Growth 8

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $2,094,000,000
Total Current Liabilities $1,389,000,000
Long-Term Debt $2,051,000,000
Total Assets $7,222,000,000
Intangible Assets $4,208,000,000
Total Liabilities $4,440,000,000
Shares Outstanding (Diluted Average) 180,800,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.20
Dec2018 $3.03
Dec2017 $1.83
Dec2016 $1.45
Dec2015 $1.87
Dec2014 $1.83
Dec2013 $1.22
Dec2012 $1.59
Dec2011 $1.50
Dec2010 $1.72

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.56
Dec2018 $2.16
Dec2017 $1.70
Dec2016 $1.62
Dec2015 $1.67
Dec2014 $1.57
Dec2013 $1.36
Dec2012 $1.27
Dec2011 $0.96
Dec2010 $0.57

Recommended Reading:

Other ModernGraham posts about the company

Xylem Inc Valuation – May 2018 $XYL
Xylem Inc Valuation – January 2017 $XYL
Xylem Inc Valuation – August 2016 $XYL
18 Best Stocks For Value Investors This Week – 1/30/16
Xylem Inc Valuation – January 2016 Update $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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