Leading water technology company Xylem Inc. (XYL) in Rye Brook, N.Y., designs, produces, and services engineered products and solutions for water and wastewater applications in the United States, Europe, Asia Pacific, and globally. The company reported stable revenue and earnings growth in the last quarter.          

However, the stock has declined 28.7% in price over the past three months and 17.6% over the past month. In addition, it is currently trading below the 50-day and 100-day moving averages of $112.49 and $121.53, respectively, indicating bearish investor sentiment.

The company expects to experience continuing supply chain constraints and semiconductor chip shortages in the first half of 2022. This has raised investors' concerns about its prospects.

Here is what could shape XYL's performance in the near term:

Strong Profitability

XYL's 8.2% net income margin is 27.3% higher than the 6.5% industry average. Also, its gross profit margin, and levered FCF margin are 30.2% and 21.9% higher than their respective industry averages. And its $538 million cash from operations is 162.4% higher than the $205.06 million industry average.

Premium Valuations

In terms of forward non-GAAP P/E, the stock is currently trading at 34.64x, which is 80.9% higher than the 19.15x industry average. Also, its 4.81x forward Price/Book multiple is 73.7% higher than the 2.77x industry average. Furthermore, XYL's 3.06 forward Price/Sales is 102.9% higher than the 1.51x industry average.

POWR Ratings Reflect Uncertainty

XYL has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. XYL has a C grade for Value and Stability. The company's higher than industry valuation is in sync with the Value grade. In addition, the stock's 1.07 beta is consistent with the Stability grade.

Among the 39 stocks in the B-rated Industrial – Manufacturing industry, XYL is ranked #32.

Beyond what I have stated above, one can view XYL ratings for Growth, Momentum, Quality, and Sentiment here.

Bottom Line

XYL possesses strong profitability and has exhibited stable financial performance amid accelerating supply chain headwinds in its last reported quarter. However, the ongoing semiconductor chip shortage could hamper its near-term growth prospects. In addition, given its premium valuation, we think investors should wait before investing in the stock.

How Does Xylem Inc. (XYL) Stack Up Against its Peers?

While XYL has an overall C rating, one might want to consider its industry peer Mueller Industries Inc. (MLI), Core Molding Technologies Inc. (CMT), and Vishay Precision Group Inc. (VPG), which has an overall A (Strong Buy) rating.

XYL shares were unchanged in premarket trading Thursday. Year-to-date, XYL has declined -20.64%, versus a -4.51% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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