This water tech stock can rally nearly 25% following 'transformative' acquisition, Goldman says

Published Thu, Jun 8 20237:17 AM EDTUpdated Thu, Jun 8 202312:06 PM EDT

Investors should buy Xylem after its acquisition of fellow water technology firm Evoqua, Goldman Sachs said. The bank reinstated its buy rating on Xylem with a price target of $133, which implies a 24.2% upside from where the stock finished during Wednesday's session. "Simply put, we believe XYL's acquisition of Evoqua has strong strategic merit as it will add to XYL's already broad portfolio of water infrastructure and treatment solutions, strengthen its footing in industrial end markets, and further solidifies XYL as an ESG winner, all while being able to realize meaningful cost synergies in the coming years," analyst Brian Lee said in a note to clients Wednesday. Lee noted revenue synergies between the companies can create upside, with Xylem focused mainly on global utilities and Evoqua having a network on industrial companies in North America. He said there could be between 3% and 6% upside to revenue and potential to add between 4% and 15% to EBITDA. Costs can also be helped by the acquisition, he said, calling the agreement "transformative." In the deal, Lee said the company gains a portfolio of water treatment solutions and better placement in U.S. industrial end markets. The newly expanded company should have a better mix of public and industrials, which are both considered more stable than end markets that are mainly residential focused, he added. Meanwhile, he said valuation is more attractive following the stock's underperformance so far this year. Multiples have compressed around the historical average despite expectations for better growth and earnings upside following the deal. XYL .SPX YTD mountain Xylem and the broad S & P 500 index, year to date Lee also noted the stock is "fully levered to ESG themes," referring to the environmental, social and corporate governance acronym, as the company can be tied to a variety of sustainable-use cases given its wide portfolio of water infrastructure and treatment offerings. He said the company's modest premium compared with peers can be tied in part to how well it does in ESG screens. The acquisition only "further strengthens its status as a clear ESG winner," Lee said. Still, Lee noted there are risks that could affect performance, including worse-than-expected cost synergies, slow organic growth or supply chain challenges. Any difficulties with acquisition integration could also affect the stock, he said. — CNBC's Michael Bloom contributed to this report.