Editor’s Note: In our ongoing effort to improve Hedgeye research, we’d like your feedback on the Stock Report below. If a write-up of each stock on Investing Ideas is valuable to you, let us know. Feedback about the stock report’s length or the content is also welcome.
This report was generated using published research from our Industrials team led by Sector Head Jay Van Sciver.
Regardless of the economic and political climate, clean, fresh water remains a universal need. Xylem Inc. (XYL) is poised to emerge as a leader in fulfilling this demand. Xylem is a global water technology provider specializing in the delivery and use of drinking water, as well as the collection, testing and treatment of wastewater.
Executive Summary
Global awareness continues to grow for critical issues like water contamination and climate change, leading to increased investment in water management. Aging water infrastructure, often dating from the Clean Water Act period in the USA, is often in need of replacement. Xylem stands to benefit from this upcycle.
The company’s earnings report in early February supports this investment thesis. Orders were up 10% year-over-year in Q4 2023, in a quarter with a 9% organic revenue growth. Earnings and 2024 guidance beat consensus expectations.
Industry Outlook: A Prolonged Replacement & Upgrade Cycle
Let’s look deeper at the factors contributing to an upcycle for the water infrastructure sector and Xylem in particular:
- Increased Global Awareness and Legislative Momentum: Global awareness of the importance of sustainable water management has spurred legislative efforts and increased support for addressing water contamination, runoff, and wastewater challenges. Consequently, there is significant needed investment in water infrastructure revitalization. These legislative actions demonstrate a commitment to protecting public health and ecosystems representing a strategic shift towards securing water sustainability for the future.
- Past Legacy of Underinvestment: For decades, the critical infrastructure that underpins our water supply and treatment systems has suffered from prolonged underinvestment. This has resulted in aging water infrastructure, from pipes and treatment facilities. The accumulated demand from deferred maintenance for upgrades and replacements presents a substantial opportunity for Xylem investors.
Strategic Positioning of Xylem
A Market Leader in Water Infrastructure
With an extensive portfolio of solutions and a strategic focus on addressing the critical needs of water management, Xylem is well-positioned to capitalize on the expanding market opportunities. The company’s extensive range of products and services — from advanced filtration systems to smart water meters — caters to the entire water cycle.
Government & Regulatory Tailwinds
- Significant investment from the Infrastructure Bill (~50 billion for water) and other legislative actions are set to benefit Xylem.
- Initiatives like the CHIPS Bill and Inflation Reduction Act (IRA) bolster demand for Xylem’s offerings.
- Regulations around contaminants that are harmful to humans and animals further drive investments in water treatment solutions, notably PFAS.
The company is set to play a significant role in each of these initiatives, providing the technologies and expertise required to upgrade and modernize water systems. This scale of legislative support is a powerful catalyst.
Financial Resilience and Opportunities
Despite critiques, Xylem’s realignment under new management and strategic acquisitions of competitors positions it for improved growth and operational efficiencies. The company is proactively addressing integration and alignment opportunities. This foresight to tackle operational challenges, coupled with the introduction of new leadership (, signifies a better trajectory for Xylem’s future.
A Robust Revenue Stream for Your Portfolio
Xylem Inc. represents a compelling investment opportunity, underpinned by robust fundamentals in the water infrastructure sector, strategic corporate actions, and favorable government and regulatory dynamics. We recommend Xylem as a long, anticipating that the company will outperform as it capitalizes on the significant growth opportunities within the water sector.
Conclusion: Long Xylem Inc. (XYL)
Appendix: Key Financial Terms Defined
- PFAS Regulation: Pertains to rules and guidelines governing the management, treatment, and disposal of per- and polyfluoroalkyl substances, which are a group of manufactured chemicals that are found in many consumer products and industries.
