What's In The Cards For Xylem (XYL) This Earnings Season?

Leading global water technology company, Xylem Inc. (NYSE:XYL) is scheduled to report first-quarter 2017 results before the opening bell on May 2.

The stock reported a positive average earnings surprise of 2.13%, over the trailing four quarters.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

During the quarter, Xylem secured a contract worth $1.5 million to offer new, more efficient pumps for use at a wastewater treatment plant in Pineville, NC. Such projects will help the company boost its revenues.

Xylem aims to boost its financials on the back of lucrative business acquisitions. For instance, the buyout of Tideland Signal Corporation (Feb 2016) is reinforcing the company's sales in the costal and ocean markets. Also, the strategic acquisitions of Sensus and Visenti (Oct 2016) are expected to solidify the company's growing public utility business and augment its revenues and profitability over the long term. The Sensus buyout, in particular, is enhancing Xylem's smart infrastructure portfolio and increasing its exposure to the rapidly growing end markets. The company raised its 2020 financial goals largely on account of its Sensus and Visenti acquisition benefits.

However, weak prices of energy resources like oil are currently affecting the revenues generated by manufacturing and industrial companies like Xylem. Choppy oil prices are directly affecting the oil companies’ sales and hence, significantly reducing the extent of Greenfield investments made within the sector. As a result, lower investments made by the oil companies reduced the sales generated by producers of heavy equipment, machinery parts and steel.

Also, Xylem’s operating margin is highly sensitive to continuous price fluctuations of major inputs like nickel, copper, aluminum, plastics, seals, bearings, motors and fabricated parts.

Each business segment of Xylem faces stiff competition. Extensive business rivalry increases the bargaining power of customers and thus, exposes the company to risks of market share loss. In order to retain its competitive power, Xylem is forced to make heavy innovation and turnkey project investments, which add to its near-term aggregate debt level. Even so, the appreciating U.S. dollar is enhancing the competitive power of smaller companies operating in low-cost nations, thereby increasing revenue and margin loss risks for Xylem.

Earnings Whispers

Our proven model does not conclusively show that Xylem is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as we will see below.

Zacks ESP: Xylem currently has an Earnings ESP of -5.13%. This is because the stocks’ Most Accurate Estimate of 37 cents is below the Zacks Consensus of 39 cents.You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Xylem’s Zacks Rank #3 and a negative earnings ESP make surprise prediction inconclusive.

Note that we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some stocks within the industry that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat:

AGCO Corporation (NYSE:AGCO) , with an Earnings ESP of +5.88%, and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Altra Industrial Motion Corp. (NASDAQ:AIMC) , with an Earnings ESP of +5.00%, and a Zacks Rank #2.

Adient plc (NYSE:ADNT) , with an Earnings ESP of +1.64%, and a Zacks Rank #3.

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