Raymond James: Water Is A Necessity, And So Is Xylem Stock

Xylem Inc XYL is one of the few pure plays for investors to gain exposure to the sustainability of water, which makes it a stock that is not cheap, but certainly "well worth it," according to Raymond James.

The Analyst

Raymond James' Pavel Molchanov initiated coverage of Xylem with an Outperform rating and $90 price target.

The Thesis

Water scarcity and sustainability is a long-term global issue that Xylem looks to address, Molchanov said in the initiation note. (See the analyst's track record here.)

This is especially true when considering multiple "headline-grabbing water crises" headlines from Flint, Michigan to Gujarat, India, the analyst said.

After all, there is no substitute for water and innovation in supply and distribution is of extreme importance.

Xylem enters the picture through its three business units, Molchanov said:

• Water infrastructure, accounting for 41 percent of 2018 revenue with a $17-billion addressable market, which offers solutions for clean water delivery.
• Applied water, accounting for 30 percent of revenue with a $19-billion addressable market, which addresses the end user-facing end of the water value chain.
• Measurement and control solutions, accounting for 29 percent of reveue with an $18-billion addressable market, which is the newest and fastest-growing segment and created out of the 2016 acquisition of Sensus.

Given Xylem's importance to the future of sustainable living across the world and few competitors, the stock warrants a "reasonable scarcity premium" of 26 times 2019 estimated non-GAAP EPS, which drives Raymond James' $90 price target, Molchanov said.

The assumptions for this objective include mid-single-digit organic sales growth per year; continued M&A activity; modest gross margin improvements; and 12-15 percent dividend growth per year, the analyst said. 

Price Action

Xylem shares were trading higher by 3.24 percent to $78.03 at the time of publication Wednesday.

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