Xylem Earnings: Healthy Demand and Supply Chain Improvement Drive Strong Revenue Growth

Narrow-moat-rated Xylem XYL reported strong first-quarter results, featuring a 53% year-over-year increase in adjusted EPS, from $0.47 to $0.72, driven by robust demand across all segments as well as improvement in chip supply. We’ve increased our fair value estimate to $97 from $95, which reflects our slightly more optimistic near-term revenue growth projections as well as time value of money.

Xylem’s first-quarter organic revenue increased by 17% from the same period last year, with double-digit organic revenue growth across all three segments: 10% in applied water, 15% in water infrastructure, and 32% in measurement & control solutions. The key drivers of the strong growth in measurement & control solutions were chip supply improvement as well as robust demand across all business lines. The segment ended the quarter with a $2.1 billion backlog, positioning it well for continued revenue growth.

Xylem delivered a solid 210-basis-point year-over-year adjusted EBITDA margin expansion, from 14.2% to 16.3%, driven by volume leverage, productivity savings, and price realization. We were especially encouraged by the 690-basis-point margin expansion in measurement & control solutions. The segment generates high incremental margins, so we expect easing chip supply constraints to not only help accelerate Xylem’s revenue growth but also boost the firm’s margins.

After a solid first quarter, management raised its outlook for full-year 2023 and now anticipates organic revenue growth of 8%-9% (up from 4%-6%) and adjusted EPS of $3.15-$3.35 (up from $3.00-$3.25). By segment, the updated guidance bakes in organic revenue growth in the high single digits in water infrastructure, midsingle digits in applied water, and high teens in measurement and control solutions. Xylem’s guidance does not reflect the planned acquisition of Evoqua, which remains on track to close by midyear.