Industrials

Report by Behind the Numbers

The company continues to command a growth multiple despite producing little underlying growth. Q2 revenue rose just 1.5% Y/Y and still missed consensus, while several accounting tailwinds appear to be supporting reported results. The key concern is contract assets: revenue recognised before it has been billed. These rose by $202m Y/Y, compared with only $25m of revenue growth, and BTN estimates this lower-quality revenue source explains nearly all of XYL’s 12c adjusted EPS beat. Without the contract-asset tailwind, the revenue miss would have been far larger. Contract liabilities also continue to fall both in absolute dollars and as a percentage of sales, raising additional questions about the sustainability of reported revenue growth.

Report by Kailash Capital Research

SMCI shares fell nearly 20% after the company delayed the filing of its annual report and Hindenburg Research alleged “fresh evidence of accounting manipulation”. Interestingly, SMCI features in KCR’s S&P 500 Earnings Manipulator list, which includes stocks in 1) the worst quintile based on academia’s PROBM formula and 2) the bottom 20% of KCR’s ranking methodology. Other companies flagged include Advanced Micro Devices, Tesla, and Xylem, with Block and Emerson Electric added last month. Over the past 14 years, KCR’s Research Short Portfolios have been valuable for spotting potential risk flags and generating short ideas. To access the return summary for these portfolios click here.

Report by Trivariate Research

Trivariate Research's latest report analyses FCF trends of US corporates, both yield and conversion, efficacy of the signal and opportunities that may surface when financial conditions tighten. Key findings include: 1) FCF yield works in SMID cap and middle quality best. 2) From a sector perspective, it is effective in Machinery; volatile in Healthcare. 3) FCF yield matters more when financial conditions are loose. As soon as it begins tightening, de-emphasizing FCF yield and focusing on FCF conversion to pick winners from losers in “junk stocks” is prudent. 4) Quantitatively derived longs include Cigna, Cummins and Centene. Shorts include Elevance Health, Humana and Xylem.