Xylem: A Clean Water Play for the Future

The world's need for fresh water and related infrastructure grows every year. Xylem is a pure play set to take advantage.

Jul 21, 2014 at 4:02PM

Xylem (NYSE:XYL) is a water technology company with a global footing. It handles the transport, treatment, testing, and filtration of water. The company derives the bulk of its sales from the U.S. and Europe, with smaller percentages coming from emerging markets. Xylem is a pure play on water technology since most competitors are in multiple other industries. With a new CEO, a vision for the future, opportunities in emerging markets, and the growing need for water-related infrastructure, Xylem deserves a closer look. 

New CEO with a vision
In early March, Xylem hired a new CEO, Patrick Decker. Before being appointed CEO of Xylem, Mr. Decker was the CEO of Harsco Corporation, which is an industrial services company. One could argue that someone in the position of CEO would not leave his current post unless he saw a significant opportunity and believes there is significant value to be created. Mr. Decker currently owns 85,342 shares of Xylem stock with a current value of $3.2 million. He was awarded 165,584 stock options that do not fully vest until 2024, giving him a long-term incentive for performance. A CEO that is properly aligned and shares in the risk of shareholders is a good sign for long-term investing. 

Mr. Decker is a firm believer in a managerial tool called "Lean Six Sigma," which at its core is aimed at eliminating waste and increasing efficiency. He has had success using Six Sigma at prior companies with the goal of reducing expenses and increasing margins. While he was working at Tyco International, he grew revenues substantially in the emerging markets (which is a huge growth area for Xylem). Here we have a shareholder-aligned CEO with a vision. Investors should look for situations of this kind and go along for the ride. 

Opportunity arises
Developing countries will continue to need increased access to fresh water, whether it be for farmers who need irrigation systems, manufacturers, housing complexes, or business offices. In a recent investor presentation, Xylem cited the following areas for long-term growth: under-served markets, pent-up demand in the U.S. and Europe, emerging market infrastructure development, and increased demand for energy efficient products. 

Source: Xylem

This illustration shows locations for production and service centers run by Xylem. The concentration of locations in China and other emerging markets is minimal when compared to the U.S. and Europe. There is still a need for significant spending on infrastructure in the U.S., as the ASCE Report Card for American Infrastructure for 2013 gave the U.S. an abysmal rating. The report talks about our drinking water infrastructure being near the end of its useful life and the degradation of existing pipes leading to waste. Companies such as Xylem are set to upgrade these systems with more efficient and new equipment. 

The fracking boom in the U.S. oil and natural gas industry is a huge growth area for Xylem as well. Hydraulic fracturing requires significant amounts of water. This water has to be transported from somewhere, and Xylem provides the equipment to do so. We often see mentions in the news of pollution and the dumping of waste into water supplies in China. Xylem already does business in China to help combat these issues, so this is another potential growth area. 

Risk
Just because there is significant opportunity for new business doesn't mean that someone is going to pay for it. The poor infrastructure in the U.S. and China is easy to see, but for Xylem to benefit from this, spending needs to increase. Though the investment thesis behind this company is highly long-term in nature, the need for funding of these projects can cause volatility over short to medium time horizons.

This is evidenced by Xylem management stating in the most recent 10-Q: "In 2014, we continue to expect a slow recovery in the United States industrial markets combined with modest improvement in performance in our European industrial end markets. In general, we expect a slow recovery in most of the developed country end markets and modestly higher levels of growth in emerging markets."  

Xylem has operations in over 150 countries, causing the company to be exposed to many different kinds of currency fluctuations which could impact earnings. To take advantage of emerging markets growth, capital expenditures will need to be increased significantly. This will put a strain on free cash flow (FCF) growth in the near term while Xylem increases capacity. Increased capital spending will hopefully pay off in the long-term with increased revenue, market share, and FCF for shareholders.

Putting it all together
The investment thesis behind Xylem is a long-term play on the ever-growing need for fresh water and related infrastructure. There may be short- to medium-term headwinds as outlined above. Long-term investors should not be concerned with these kind of fluctuations, though. The need for the services that Xylem provides will only grow as emerging markets spend more on infrastructure upgrades. Investors would be wise to take a closer look at this pure play on water.

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Zach Friesner has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers