Water technology company Xylem (NYSE:XYL) announced better-than-expected revenue in Q1 CY2025, with sales up 1.8% year on year to $2.07 billion. The company expects the full year’s revenue to be around $8.75 billion, close to analysts’ estimates. Its non-GAAP profit of $1.03 per share was 8% above analysts’ consensus estimates.

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"The team’s first-quarter results exceeded expectations, continuing our momentum and delivering a strong start to 2025,” said Matthew Pine, Xylem’s president and CEO.

Company Overview

Formed through a spinoff, Xylem (NYSE:XYL) manufactures and services engineered products across a wide variety of applications primarily in the water sector.

Sales Growth

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Xylem grew its sales at an impressive 10.9% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers, a helpful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Xylem’s annualized revenue growth of 22.8% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Xylem’s organic revenue averaged 7.5% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results.

This quarter, Xylem reported modest year-on-year revenue growth of 1.8% but beat Wall Street’s estimates by 1.5%.

Looking ahead, sell-side analysts expect revenue to grow 2.9% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

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Operating Margin

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Xylem has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Xylem’s operating margin rose by 3.2 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Xylem generated an operating profit margin of 11.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Xylem’s solid 10% annual EPS growth over the last five years aligns with its revenue performance. This tells us its incremental sales were profitable.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

Although it performed well, Xylem’s two-year annual EPS growth of 13.7% lower than its 22.8% two-year revenue growth.

In Q1, Xylem reported EPS at $1.03, up from $0.90 in the same quarter last year. This print beat analysts’ estimates by 8%. Over the next 12 months, Wall Street expects Xylem’s full-year EPS of $4.40 to grow 8.1%.

Key Takeaways from Xylem’s Q1 Results

We enjoyed seeing Xylem beat analysts’ revenue and EPS expectations this quarter. We were also happy its full-year revenue guidance was raised. On the other hand, its full-year EPS guidance slightly missed. Overall, this quarter had some key positives. The stock traded up 1.9% to $118 immediately following the results.

Xylem put up rock-solid earnings, but one quarter doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.