What happened
Shares of water technology company Xylem (XYL 0.15%) had slumped by around 10% midday on Thursday. Investors were left unimpressed by very disappointing fourth-quarter earnings and guidance for 2022.
It's no secret that many companies have suffered soaring supply chain costs and disruptions due to the resurgence of coronavirus and government actions in response. Unfortunately, Xylem is one of them.
A water treatment plant. Image source: Getty Images.
It was so bad that Xylem missed the 2021 guidance that management set on its investor day presentation at the end of September. For example, in September, management forecast full-year 2021 revenue of $5.3 billion to $5.4 billion, with adjusted earnings per share (EPS) of $2.55 to to $2.70.
A few months later, the full-year numbers came in at $5.2 billion and $2.49. And it gets worse. Management's guidance for 2022 calls for revenue of $5.25 billion to $5.35 billion and adjusted EPS of $2.35 to $2.70.
Note that the midpoints of the 2022 guidance are lower than the midpoints of the guidance management gave for 2021 in September!
So what
This sort of disappointment will lead investors to question the long-term guidance given in the investor day presentation. In September, management told investors to prepare for 4% to 6% annual organic revenue growth and margin expansion in earnings before interest, taxes, depreciation, and amortization (EBITDA) through to 2025.
However, organic growth is forecast to be just 3% to 5% in 2022, and EBITDA margin is predicted to be in the range of 16% to 17%, compared to 17.1% in 2021.
Now what
CEO Patrick Decker referred to "accelerating supply chain headwinds" in the quarter and expects a difficult first half of 2022 due to ongoing semiconductor shortages but better conditions in the back half. Xylem will need an improvement because even on the high end of its earnings guidance, it still trades on nearly 35 times forward earnings.
The company still has some exciting technology and growth prospects, but its management is going to have to start delivering in 2022 before investors feel fully confident buying in.
