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Xylem Is Too Expensive

Mar. 09, 2020 2:22 PM ETXylem Inc. (XYL)5 Comments
Patrick Doyle profile picture
Patrick Doyle
6.57K Followers

Summary

  • Although Xylem is expected to slow over the next year, long term I think it's a great, well run business.
  • That said, a great company can be a terrible investment at the wrong price. For that reason, I must avoid until a better entry price comes along.
  • For those like me who are impatient, I recommend a specific short option trade here that presents investors with what I consider to be a "win-win" trade.

In spite of the recent drop, shares of Xylem Inc. (NYSE:XYL) are up about 8.2% over the past year. The fact that the shares are down nicely over the past few weeks has put the company on my radar. I thought I’d check in to see if this is a buy at these levels.

I’ll try to answer this question by looking at the state of the business, highlights of the financial history, and the stock. For those who are impatient enough to stop and read the title of this article, and who can stand neither the suspense, nor my writing, I’ll come to the point. This is a fine company, the problem is that the shares remain too expensive. Thankfully, the options market provides an alternative to simply buying at these levels.

Update

2019 was actually a fairly good year for the company, with revenue up across all four segments. The following graphic describes this well.

Source: 2020 Xylem Presentation

What’s particularly interesting to me is the strong free cash flow investors saw in 2019, up 75% to $613 million.

That said, the company was offering muted guidance before the market seemed to start focusing on Covid-19. Per the following, investors should expect flat revenue growth over the next year.

Source: 2020 Xylem Presentation

Thus, I think the immediate future for the business is going to be a bit soft, and I’m expecting sclerotic returns for the company over the short term. As I’m about to point out, this has generally been a growth company over the past five years, but it seems that management is telegraphing that that growth is going to be muted in the near future.

Financial Snapshot

In my view, Xylem has been a growth company over the past five years. In particular, revenue, operating profits, and net income have

ChartData by YCharts

This article was written by

Patrick Doyle profile picture
6.57K Followers
I'm a quant investment newsletter writer who marries fundamental analysis with the latest research in momentum. Over the past few years, I’ve developed a piece of software that helps me track the level of optimism and pessimism embedded in stock price. I seek to challenge the assumptions embedded in price by profitably exploiting the disconnect between what the market thinks and what is a likely outcome. I invest in those companies that have a greater than average chance of giving us all a surprise in the next few months.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I'll be selling the puts mentioned in this article this week.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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