Here’s why Xylem stock was under water today

Water infrastructure technology company shares Xylem (XYL -4.81%) they were down nearly 5% at 11:30 a.m. ET today. The drop comes after analysts downgraded the stock to a hold from a buy amid concerns about earnings momentum and valuation. Here’s the downside.

A good year for the water technology sector

An analyst at TD Cowen maintained a price target of $138 (the stock opened around that price today) but downgraded the stock. Despite the downgrade, it was a pretty good year for the water technology sector overall. Badger counterXylem and Roper TechnologiesNeptune dominates the U.S. water meter market, and the top two have grown strongly this year on the unexpected strength of water utility spending on technology solutions.

XYL data by YCharts

I say “unexpectedly” because water utilities are known for their conservatism. This has often frustrated investors, as the growth potential of smart meters and smart technology to reduce leakage and ensure quality water infrastructure is significant.

The upside potential is why investors have typically given relatively high valuation multiples to Badger Meter and Xylem.

An evaluation question

Still, with much of the good news already priced in — and, as the analyst notes, Xylem trades at 30 times expected earnings — the question is: Where does the stock go from here?

Image source: Getty Images.

So the downgrade is understandable. On the other hand, as uncomfortable as the valuation may seem, it’s not unusual for Xylem. Moreover, a lower interest rate environment is usually good news for utility spending and is certainly good news for residential spending and commercial water applications.

In summary, keep an eye on the stock as the dip could create a decent buying opportunity.