Water technology company Xylem (NYSE: XYL) announced better-than-expected revenue in Q1 CY2026, with sales up 2.7% year on year to $2.13 billion. The company’s full-year revenue guidance of $9.25 billion at the midpoint came in 0.7% above analysts’ estimates. Its non-GAAP profit of $1.12 per share was 3.3% above analysts’ consensus estimates.

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“We entered the year with sustained momentum and solid demand across key end markets,” said Matthew Pine, Xylem’s 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.

Revenue Growth

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Xylem’s sales grew at an excellent 12.7% compounded annual growth rate over the last five years. Its growth beat the average industrials company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Xylem’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 6.9% over the last two years was well below its five-year trend.

We can better understand 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 5% year-on-year growth. Because this number is lower than its two-year 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 2.7% but beat Wall Street’s estimates by 0.7%.

Looking ahead, sell-side analysts expect revenue to grow 1.7% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming 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 11.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Xylem’s operating margin rose by 2.8 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Xylem generated an operating margin profit margin of 11.5%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Xylem’s EPS grew at 16.7% compounded annual growth rate over the last five years, higher than its 12.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Xylem’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Xylem’s operating margin was flat this quarter but expanded by 2.8 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Xylem, its two-year annual EPS growth of 15.7% is similar to its five-year trend, implying strong and stable earnings power.

In Q1, Xylem reported adjusted EPS of $1.12, up from $1.03 in the same quarter last year. This print beat analysts’ estimates by 3.3%. Over the next 12 months, Wall Street expects Xylem’s full-year EPS of $5.17 to grow 7.8%.

Key Takeaways from Xylem’s Q1 Results

It was good to see Xylem provide full-year revenue guidance that slightly beat analysts’ expectations. We were also happy its revenue and EPS that outperformed Wall Street’s estimates. Overall, this was a solid quarter. The stock remained flat at $123.99 immediately following the results.

Big picture, is Xylem a buy here and now? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here (it’s free).