Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.
This past week, one Inner Circle member requests Pat’s stock investing advice on a company that has a chance to profit from the growing global demand for clean water. One of the company’s biggest areas of growth could be in the highly-publicized area of “fracking” for oil and gas, where it has acquired a new water monitoring service.
Q: Pat: Can I have your opinion on ITT spinoff Xylem Inc.? Thanks.
A:Xylem Inc. (symbol XYL on New York; www.xyleminc.com) sells equipment and services related to managing water.
The company’s products help its clients collect, distribute, use and return water to the environment. Xylem is a Greek-derived word that refers to vascular tissue that carries water and nutrients through plants.
The company operates through two divisions:
The Water Infrastructure division sells a wide range of products, including water and waste-water pumps, controls and systems, as well as water-treatment and -testing equipment.
The Applied Water division focuses on residential, commercial, industrial and agricultural water users. Its main products include pumps, valves, heat exchangers, controls and dispensing equipment.
Xylem was formed on October 31, 2011, after ITT Corp. split up into three separate companies.
ITT shareholders received one Xylem share for each share of ITT they held, plus one share of defense and information technology spinoff Exelis, and one share of the new ITT. Xylem began trading on New York on November 1, 2011.
In the three months ended March 31, 2012, Xylem’s earnings fell 19.2%, to $63 million, or $0.34 a share, from 78 million, or $0.42 a share, a year earlier. Without unusual items, such as costs related to the spinoff from ITT, earnings per share would have risen 9.1%, to $0.36 from $0.33.
Sales rose 3.9%, to $925 million from $890 million. The company has clients in more than 150 countries. Europe provides 37% of Xylem’s sales, the U.S. supplies 36%, and the Asia Pacific region contributes 11%. Other parts of the world provide the remaining 16%. Without the negative impact of currency exchange rates, sales would have risen 5.5% in the latest quarter.
The company now holds cash of $347 million, or $1.87 a share. Its long-term debt of $1.2 billion is a reasonable 25% of its market cap. The shares yield 1.6%.
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New acquisition brings clean water services for fracking
Xylem has expanded rapidly over the last two years, mainly by making $1.3 billion in acquisitions.
Its most recent purchase was on September 1, 2011, when it bought YSI Inc. for $309 million. YSI is a leading developer and maker of water-monitoring technology. This is a big growth area, especially in the U.S., where stricter environmental regulations require companies to continually monitor the effects of their operations on water quality. YSI contributed $34 million to Xylem’s sales in the latest quarter.
Right now, one of the most controversial areas of industrial water use is hydraulic fracturing, or fracking, of hydrocarbon-bearing shale. This process involves pumping a mix of water, chemicals and other materials into shale rock formations that contain oil or natural gas. This fractures the rock and releases the oil and gas.
Some environmentalists are bitterly opposed to fracking, due to fears that chemicals will leak into drinking water supplies. YSI’s systems monitor water conditions near fracking sites and provide an early warning if pollutants are released.
Vast amounts of oil and gas have been discovered in fields in North America that will require fracking, including the Marcellus Shale in Pennsylvania, the Barnett Shale and Eagle Ford Shale in Texas, and the Horn River Shale in B.C. Increased use of fracking will push up demand for YSI’s services.
The stock has gained around 8% since it split from ITT. It now trades at 13.6 times the $1.89 a share that Xylem will probably earn in 2012.
In the most recent Inner Circle Q&A, Pat assesses the major trends Xylem will seek to take advantage of in the years ahead, including global water shortages, changing weather patterns and the need for repairs to water infrastructure. He also examines the potential risks of the company’s acquisition strategy and the long-term outlook for the water business. He concludes with his clear buy-hold-sell advice on the stock.
Do you agree with environmentalists who think “fracking” should be banned altogether, because it will never be 100% safe? Or do you think 100% safety is impossible in oil and gas production, just as it is in, say, air traffic control, highway design and safety testing of new pharmaceuticals? Let us know what you think in the comments section below. Click here.
Comments
Yvette
I believe technology will respond to the concerns about water usage and contamination – that’s the job of governments – to keep the fracking “industry” honest by monitoring and insisting they minimize environmental impacts. What I am concerned about and have never heard discussion of is the possibility of ground shifting due to the shattering of the shale structures. Those would be some large sink holes!!
I can’t justify investing in a company that does water clean up from fracking operations, because, in effect, it supports an industry which does a lot more damage than just contaminated water supplies. Further, the industry will attempt to spin this as proof of their commitment to environmental responsibility. For me, it would be like investing in a nuclear radiation clean up company, when one recognized the negative impact of badly built nuclear power plants or nuclear warheads.
Fracking causes water contamination beyond the water and chemicals they inject into the earth’s surface. It causes redistribution of oil and gas, destroys usable water wells. It has not been proven safe in terms of the changes in causes in the subterranean structure. And fundamentally, if does not address our continued and illogical demands for fossil fuels, when their rarity should lead to higher pricing so our economy is forced to wean itself from them and move to cleaner and safer alternatives.
I think all resource extraction activities come with some environmental impact. I think that pollution from Fracking is threatening to those living in the area because of the unknown. “What happens to the water and chemicals once they’re in the ground”? This represents a bonanza for oil and gas companies but they’ll need to spend some money on abating the problem and become more trasnparent about their activities.
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I believe technology will respond to the concerns about water usage and contamination – that’s the job of governments – to keep the fracking “industry” honest by monitoring and insisting they minimize environmental impacts. What I am concerned about and have never heard discussion of is the possibility of ground shifting due to the shattering of the shale structures. Those would be some large sink holes!!
I can’t justify investing in a company that does water clean up from fracking operations, because, in effect, it supports an industry which does a lot more damage than just contaminated water supplies. Further, the industry will attempt to spin this as proof of their commitment to environmental responsibility. For me, it would be like investing in a nuclear radiation clean up company, when one recognized the negative impact of badly built nuclear power plants or nuclear warheads.
Fracking causes water contamination beyond the water and chemicals they inject into the earth’s surface. It causes redistribution of oil and gas, destroys usable water wells. It has not been proven safe in terms of the changes in causes in the subterranean structure. And fundamentally, if does not address our continued and illogical demands for fossil fuels, when their rarity should lead to higher pricing so our economy is forced to wean itself from them and move to cleaner and safer alternatives.
I think all resource extraction activities come with some environmental impact. I think that pollution from Fracking is threatening to those living in the area because of the unknown. “What happens to the water and chemicals once they’re in the ground”? This represents a bonanza for oil and gas companies but they’ll need to spend some money on abating the problem and become more trasnparent about their activities.