XYL – Market expectations are for continued Uniform ROA improvement, but management may have concerns about margins, their backlog, and the coronavirus

September 29, 2020

  • Xylem Inc. (XYL:USA) currently trades near historical highs relative to UAFRS-based (Uniform) earnings, with a 32.3x Uniform P/E. At these levels, the market has bullish expectations for the firm, but management may have concerns about margins and OpEx, their backlog, and the coronavirus impact
  • Specifically, management may lack confidence in their ability to sustain backlog growth, mitigate working capital declines, and maintain service delivery in India. In addition, they may have concerns about the developing sector trends and coronavirus pressures on their backlog as well as clean water business. Moreover, management may be exaggerating the business durability during challenging times, their ability to come out of 2020 in a strong position, and the potential of the smart networking deployment contract with Anglian Water to generate $90 million in revenue. Finally, they may be concerned about continuing to grow OpEx spending for the wastewater business and their current margin mix