$XYL · Ale's World of Stocks · 2026-11-01

Now, we move directly to the second arrow. This would be our medium-risk option. The truth is, I only describe it as "average" because of the way the market is currently treating it.

In reality, I would easily classify it as a low-risk stock if you're thinking long-term. But you will understand what I mean here. We will talk about that. This will be at the global water technology giant, Xylem, whose symbol is (XYL).

Just last week, Xylum took a severe hit after announcing its earnings. Its shares plummeted by more than 15% to their lowest level in 52 weeks. It has now even been in negative territory for the past five years as well.

Its value has fallen to almost half of its highest level, something I honestly never expected to see.

Simply put, I think what we have here is just a few quarters where the company is experiencing timing problems that are causing a short-term business bottleneck, and that's something investors don't seem to have the patience to tolerate.

In this last quarter, for example, sales fell slightly by approximately 3% year-over-year, while earnings per share came in less than 1% below analysts' estimates. But the thing is, this came after five consecutive quarters of exceeding expectations.

So, this surprised investors, even though the difference was very small.

But far more importantly, management has lowered its forecasts for the entire year due to project delays. I will return to these points shortly, but remember that these delays were a result of the cities' careful management of the facilities, where they chose to postpone installation dates for 4 to 8 months due to inflation, high financing costs, and even the shortage of contractors that the entire sector is suffering from.

This is not a problem specific to Xylum alone, but rather a macroeconomic problem. In other words, this is not a collapse in demand, nor is it a fault of anything Xylum itself is doing.

Simply put, the demand is still there, and it's as vital as ever, and cities need to implement these projects, but they simply haven't completed the installations yet to the point where Xylum can record sales on their income statement.

In fact, Xylum's organic orders—that is, future orders—grew at a double-digit rate of 10% during the quarter. This is enormous. This clearly means that there is still an amazing demand for it.

Their order-to-sales ratio has exceeded one, and the value of their backlog of contracts has increased by 13% year-on-year to reach a massive $5.5 billion. So I repeat, it's not that the businesses are fading away.

Rather, it is being pushed back to a later time, you know, to 2027 and of course to 2028.

We can clearly see this in analysts' forecasts indicating double-digit growth in earnings per share in the coming years, with expectations of breaking record levels. The management even pointed out that optional construction projects, which carry a higher risk of additional delays, make up less than 10% of their work.

While the vast majority of what Xylum provides to cities is actually daily repair and maintenance work. Things that simply cannot be postponed.

For example, if a main water pump breaks down or a pipe bursts, the city cannot simply wait for interest rates to fall. They need to fix these things immediately, and this is the area where Xylum excels, and it constitutes the bulk of their business.

In my opinion, Xylum is the best in this field. In addition, they are benefiting from new growth engines that I feel Wall Street is still somewhat oblivious to. For example, their data center demand has increased by more than 200% year-on-year.

This has happened for the second quarter in a row. Well, admittedly it's still a small part of what Xylum does, but it's growing rapidly. And I believe that in the long run it will become a more vital contributor to their profits and revenues.

As an example, they have just expanded their relationship with Amazon to provide them with processing solutions for large-scale data centers. It is the world's largest cloud operator.

Therefore, this is extremely important. It is a huge vote of confidence to be in partnership with them.

And it doesn't stop there. During the earnings call, the CEO revealed that they had even secured a huge new forward contract to provide ultra-pure water treatment for a major chip manufacturing plant here in America.

Now, they were unable to disclose the identity of the company because it is still subject to a non-disclosure agreement, but they referred to it as one of the world's leading semiconductor manufacturers, and that it has a vital manufacturing facility here in the United States.

I mean, this deal could be huge for Xylum, and it will really open up a lot of other doors in the future.

But again, these are all things that the market doesn't really pay much attention to. If you are following the stock, I ask you: Have you seen any mention of these things anywhere, or have you only seen that Xylum failed to achieve earnings per share, or that Xylum lowered its expectations?

It seems as if, if a stock is not among the most popular and traded in the market, you will only get a very superficial analysis from so-called experts, and the market automatically punishes the stock for that.

I simply believe that the algorithms see this, press the sell button, and things get worse. Once anything seems even slightly abnormal on the surface, no one digs any deeper. They just keep selling, and that's how you end up in a situation like this.

However, I have long-term confidence in Xylem. I believe their work is vital and extremely important. I believe their market is the best of all. I think the stock is currently much cheaper than it should be.

It is about 50% lower than its five-year average, and 16% lower than the sector average despite being a leading company.

In addition, you will also receive good and growing dividend payouts. We recently talked about how important it is to invest in dividend growth. Well, this company is a great example of that.

You will get a return of approximately 2% with a continuous increase for more than a decade, which literally means that the company has raised its dividends every year since going public.

Best of all, the dividend payout ratio is astonishingly small. I mean, according to the Seeking Alpha website, the percentage in the single digits is only 7%. You can't tell me that these distributions won't grow much larger in the future.

Therefore, I believe that when you take all these factors into account, it seems to me that it is the right time to accumulate stocks in my long-term financial position.