Smart Metering And Water Infrastructure Will Secure Lasting Value

Key Takeaways

• Rapid adoption of smart technologies and infrastructure investments are driving recurring, higher-margin revenue streams and expanding Xylem's market opportunities.
  
• Recent acquisitions, operational efficiencies, and service-focused integration efforts are supporting long-term growth, improved margins, and enhanced earnings visibility.
  
• Strategic shifts away from less effective regions and reliance on developed markets may constrain growth, heighten revenue volatility, and increase operational and margin risks.

Catalysts

Engages in the design, manufacture, and servicing of engineered products and solutions for utility, industrial, and residential and commercial building services settings worldwide.

• Rapid adoption of smart metering and advanced monitoring solutions is driving double-digit growth in Xylem's Measurement and Control Solutions segment, reflecting resilient end-market demand for digital infrastructure upgrades-this is likely to drive revenue and expand higher-margin recurring earnings.
  
• Significant and increasing investment in aging water infrastructure (notably in the U.S. and U.K.) underpins a strong multi-year backlog (> $5 billion), with anticipated order rebounds as funding cycles and regulatory timelines normalize-supporting steady revenue growth and greater earnings visibility.
  
• Continued market and regulatory push for advanced water treatment, nutrient removal, and zero-liquid-discharge solutions is expanding Xylem's addressable market, as evidenced by recent acquisitions (Vacom, Envirex) that add higher-value, differentiated offerings-supporting long-term revenue and margin expansion.
  
• The company's operational simplification and implementation of the 80/20 model is already delivering record on-time performance, increased productivity, and measurable margin improvements, signaling sustainable cost efficiencies and enhanced net margins moving forward.
  
• Successful post-acquisition integration of Evoqua and revenue synergies from services expansion are accelerating Xylem's shift toward more recurring, higher-margin aftermarket and services revenue streams, boosting earnings stability and long-term profitability.

Xylem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Xylem's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.7% today to 13.7% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $5.7) by about August 2028, up from $938.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.7x on those 2028 earnings, down from 37.2x today. This future PE is greater than the current PE for the US Machinery industry at 23.8x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.06%, as per the Simply Wall St company report.

Xylem Future Earnings Per Share Growth

Risks

• Persistent weakness and declining orders in China and certain developing markets-partly due to economic challenges and Xylem's deliberate pullback from less effective regions-may limit long-term growth opportunities and increase over-reliance on developed, especially North American, markets, increasing exposure to public funding cycles and resulting in potential revenue volatility.
  
• Delays and uncertainties in government infrastructure funding cycles in key markets (e.g., the U.K. AMP cycle delays, Canadian funding timing, and investor worries about potential U.S. municipal funding cuts under changing political administrations) could create year-to-year revenue unpredictability and dampen medium-to-long-term growth rates.
  
• Exposure to evolving and potentially escalating tariffs and trade disputes (Section 232 and others), as well as ongoing FX volatility, risk increased input costs and possible disruptions in supply chains, which are only partially offset by pricing actions and simplification, resulting in the possibility of compressed margins and reduced earnings.
  
• Execution risks related to business transformation, ongoing simplification, and large-scale acquisitions (e.g., integration of Evoqua, cultural alignment, and 80/20 implementation) could lead to operational inefficiencies, missed synergy targets, or temporary loss of focus in some business units, ultimately impacting margin expansion and earnings growth.
  
• The strategic decision to "walk away from volume" in certain segments and focus on highly developed markets may reduce overall addressable market size and hinder longer-term top-line expansion, while concentrated efforts on margin improvement and simplification may eventually face diminishing returns, capping revenue growth and potentially impacting net income growth rates over time.

Valuation

• The analysts have a consensus price target of $157.562 for Xylem based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $175.0, and the most bearish reporting a price target of just $125.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.2 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 34.7x, assuming you use a discount rate of 8.1%.
• Given the current share price of $143.53, the analyst price target of $157.56 is 8.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.