Overview
RBC Capital has reaffirmed its Outperform rating on Xylem and kept a $176.00 price target after the pump and water-technology company reported fourth-quarter 2025 results. That price target implies substantial upside from Xylem’s prevailing share price of $130.89, and InvestingPro data indicates the stock is viewed as undervalued under a Fair Value model. The shares trade at a price-to-earnings ratio of 36.31, which RBC regards as high relative to Xylem’s near-term earnings growth trajectory.
Quarterly performance highlights
Xylem delivered an operating result that beat RBC’s model by 5.5 cents, equal to a roughly 4% upside versus that internal forecast. Organic sales rose 4% year-over-year, topping both external estimates and the company’s own guidance range of 2% to 3%. The Water Infrastructure business was a standout, posting margin expansion of 590 basis points year-over-year. By contrast, the Applied Water Systems and Measurement & Control Solutions segments fell short of margin expectations.
Orders momentum was positive, with organic orders growing 7% year-over-year in the quarter and a pronounced 22% increase in Measurement & Control Solutions orders. Xylem reported a book-to-bill ratio of roughly 1x for the period. Free cash flow conversion was especially strong at 210%, well above the historical fourth-quarter average of 168%.
Guidance and near-term outlook
Guidance for fiscal 2026 provided a mixed signal. Full-year EPS and EBITDA margin ranges broadly bracket consensus expectations, but the company’s organic growth outlook of 2% to 4% falls short of the 4.5% consensus. Management attributes part of the growth shortfall to its "80/20" initiative, which it said will create approximately a 2 percentage point revenue headwind in 2026, predominantly affecting the Measurement & Control Solutions segment.
First-quarter 2026 EPS guidance was issued about 6% below consensus, implying a potential back-half weighting to the year relative to analyst models. In addition, free cash flow margin guidance of 10% to 11% missed the consensus expectation of roughly 12.5%.
Earnings and dividend information
For the quarter, Xylem posted adjusted earnings per share of $1.42, narrowly exceeding the $1.41 estimate. Revenue reached $2.4 billion versus an expected $2.37 billion. Alongside the quarterly results, the company provided a cautious tone for 2026. Long-term income investors may note that Xylem has increased its dividend for 15 consecutive years; the current yield stands at 1.14% according to InvestingPro data.
Market and investor considerations
The mixed nature of the print - strong cash conversion and outperformance in Water Infrastructure offset by margin shortfalls in other segments and a conservative growth outlook - leaves a split set of takeaways for investors. Analysts and market participants will likely weigh the upside implied by RBC’s $176 target against the company’s guarded guidance and the higher P/E multiple.
Key points
- RBC Capital reiterated an Outperform rating and a $176.00 price target on Xylem following Q4 2025 results.
- Organic sales growth of 4% outpaced guidance and estimates; Water Infrastructure margins expanded 590 basis points year-over-year.
- Free cash flow conversion was robust at 210%, while 2026 organic growth guidance of 2%-4% lagged the 4.5% consensus.
Risks and uncertainties
- Cautious 2026 guidance, including a roughly 2 percentage point revenue headwind from the "80/20" initiative, could pressure near-term top-line growth - impacting industrial and infrastructure-related demand expectations.
- Segment-level margin shortfalls in Applied Water Systems and Measurement & Control Solutions introduce execution risk across water technology and measurement markets.
- First-quarter EPS guidance coming in about 6% below consensus and free cash flow margin guidance below expectations may result in more back-half weighted performance than investors anticipated - affecting cash-flow driven valuations.
Investors assessing Xylem will need to balance the company’s strong cash conversion and infrastructure margin gains against conservative near-term guidance and higher valuation metrics.