A smart stock for the global water business

Xylem gets huge margins by concentrating on technologies and products in water treatment, analysis and transport.

By Jim J. Jubak Sep 4, 2012 5:17PM
To me it looks like Xylem (XYL), an October 2011 spin-off from ITT (ITT), knows where the money is in water. The company is focused on the technology-intensive $30 billion piece of the $280 billion global market for water equipment and services. 

Much of that larger water market consists of commodity products and services that carry relatively low margins. By concentrating on technologies and products in sectors such as water treatment, analysis and transport, Xylem was able to achieve gross margins of 38.4% in 2011 and will hit, Standard & Poor's projects, gross margins of 39% in 2012.

As part of the company's focus on where the money is in water, Xylem has been gradually shifting its market mix from developed to emerging economies, where growth is faster and margins higher. In the second quarter of 2012, when overall company revenue grew by 4% in constant currencies for the company as a whole, revenue grew by 22% in emerging markets.

The company's big exposure to slowing European economies (about 37% of sales in 2011) is a major reason that the stock has lagged this year with shares down 4.3% to date as of Sept. 3. But I see that as a chance to buy the stock at a reasonable price -- Standard & Poor’s projects operating earnings will climb by 17% in 2013 but the shares trade at just 13.7 times projected 2012 earnings per share.

The company’s revenues are likely to be stronger in developed economies (such as Europe) than the market now expects: about 40% of company revenues come from sales of products and services in the aftermarket and those revenues are much more stable than those that require new capital spending on equipment.

I'm adding these shares to my Jubak's Picks portfolio Tuesday with a target price of $30 a share by September 2013. The shares pay a dividend yield of 1.7%.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Xylem as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

1Comment
Sep 5, 2012 8:14AM
avatar

Jim

 

I've been buying water stocks, but wavering on XYL. Your article tipped me over. Never hurts to buy a bit and some dividend is better than none.

 

 

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