When investors hear about water companies, they typically think of utilities -- a traditionally safe corner of their portfolio.
However, water technology company Xylem (XYL 1.62%) is bringing smart tech to the water industry, and its solutions may deliver healthy returns for investors while saving money for its customers as well.
Source: Getty Images
Let's solve water
Xylem is named after a Greek word for the tissue that transports water in plants, meant to highlight the engineering and technology-based focus the company has toward water efficiencies. Its motto is "Let's Solve Water", explained this way:
We deliver advanced technology, equipment and solutions that solve our customers' most critical water challenges. Our vision is simple: We devote our technology, time and talent to advance the smarter use of water. We look to a future where global water issues do not exist.
Xylem serves utilities and industrial entities with both commercial and residential customers across the full water cycle. That includes everything from the delivery and measurement of drinking and process water to the collection, testing, and treatment of wastewater, even its return to the environment. What happens within that cycle makes Xylem an exciting water technology company.
For example, transportation and treatment includes monitoring and control technology with remote access and smart, connected networks that boost energy efficiency and reduce downtime and maintenance costs. The growing measurement and control solutions segment includes analytical instrumentation, providing cloud-based data analytics and remote oversight for leak detection and pressure monitoring, giving customers information that contributes to safe and efficient water processes.
A strong brand
Xylem operates three segments: water infrastructure, applied water, and measurement & control solutions. Across those segments, the end markets by percentage of sales in 2018 were utilities at 50%, industrial at 35%, commercial at 10%, and residential at 5%. As shown below, while organic growth and revenue are spread pretty evenly among the business segments, the company has been gradually growing smart water technologies in the measurement & control solutions segment.
| Segment | Q2 2019 Organic Growth | Q2 2019 Revenue as % of Total | 2018 Revenue as % of Total | 2017 Revenue as % of Total |
|---|---|---|---|---|
| Water Infrastructure |
6% | 42% | 42% | 43% |
| Applied Water | 4% | 29% | 29% | 30% |
| Measurement & Control Solutions | 6% | 29% | 29% | 27% |
Data Source: Xylem financial filings. Table by author.
Within measurement & control solutions, its smart technologies platform -- Advanced Infrastructure Analytics (AIA) -- posted 10% organic growth with greater than 30% order growth "from building interest in the AIA platform" during the first quarter.
Smart solutions
Management sees smart solutions as the key to the main issues utilities currently face. They include water losses during distribution, energy consumption at utilities, and stormwater overflow as weather events continue to put growing pressure on water systems and networks. Its work also seeks to focus attention on environmental protection, and the aging infrastructure in the United States with leak detection technology. And according to the company, there are many value levers from smart solutions, including:
Safety: Increased safety and control throughout water and wastewater operations.
Operational cost: Reducing the energy and maintenance cost in the distribution network.
Resilience: Identify, predict and prevent failures and downtime in critical equipment.
Flexibility: Increased flexibility to handle different situations (e.g. volumes, parameters) with existing infrastructure.
Xylem has been growing its smart solutions through a series of recent acquisitions, including Singapore-based smart water analytics company Visenti, smart solutions provider EmNet (formed from a collaboration between the city of South Bend, Indiana and the University of Notre Dame), and Sensus, a leader in smart meters, water network technologies, and advanced data analytics solutions.
The result is the growing ability to embed intelligence into the products it sells, and then to add data analysis for individual equipment or full networks. The information allows customers to address those core issues noted above.
Focus on the business
While CEO Decker and his team focus on the business, they do it with the bigger picture in mind. The 2025 Signature Sustainability Goals the company put out show how management is of the mindset that a business does well by doing good. The goals stress customers, the company, employees and the community. They include dedicating 1% of employee time and 1% of company profits to water-related causes and education, and providing access to clean water and sanitation solutions to at least 20 million of the world's neediest.
While Decker and Xylem seek to do good for societal needs by helping water utilities solve important problems, the business itself is well positioned to grow with this focus. Analysts believe that earnings should grow in the mid teens over the next several years with these ongoing trends. Recent quarterly results showed organic orders and revenue growth of 4% and 5%, respectively. The company is expecting organic revenue growth of 5% to 6% for 2019, plus adjusted earnings per share growth of 8% to 12%.
If that comes to fruition, that surpasses traditional utility-like returns, and this water technology company may deserve a place in a different part of your portfolio.
