Using the Earnings Power Value framework with a WACC of 8.6% and normalized earnings of $881.3M, Xylem Inc. has a fair value of $40.18 per share. The EPV range is $33.92 – $49.09 based on WACC sensitivity (7.1% – 10.1%).
| Low | Selected | High | |
|---|---|---|---|
| Normalized Earnings | 881 | 881 | 881 |
| (/) WACC | 10.1% | 8.6% | 7.1% |
| Enterprise Value | 8,740 | 10,267 | 12,441 |
| (-) Net debt | 463 | 463 | 463 |
| Equity Value | 8,277 | 9,804 | 11,978 |
| (/) Outstanding shares | 244 | 244 | 244 |
| Fair Price | $33.92 | $40.18 | $49.09 |
Earnings Power Value (EPV) estimates what a company is worth based on its current normalized earnings, assuming zero growth. It values the business as a perpetuity: Normalized Earnings / WACC. This gives a conservative floor value — the company's worth if it never grows but maintains its current profitability.
The model normalizes earnings by: (1) using sustainable gross margins (5-year average) applied to current revenue, (2) deducting maintenance-level operating expenses (average R&D + SG&A as % of revenue), (3) applying the average effective tax rate, and (4) subtracting the average excess of CapEx over D&A (net reinvestment needed to maintain current capacity).
EPV is most useful as a comparison anchor: if the market price is below EPV, the stock may be undervalued even without any growth. If market price exceeds EPV, the premium reflects growth expectations — which may or may not materialize.