Shares of water infrastructure technology company Xylem(NYSE: XYL) were down by almost 5% as of 11:30 a.m. ET today. The decline comes after an analyst rating downgrade to a hold from a buy amid concerns over earnings momentum and valuation. Here's the lowdown.
A good year for the water technology sector
An analyst at TD Cowen maintained a $138 price target (the stock opened around that price today) but downgraded the rating on the stock. The downgrade notwithstanding, it's been a pretty good year for the water technology sector in general. Badger Meter, Xylem, and Roper Technologies' Neptune dominate the water meters market in the U.S., and the first two are up strongly this year due to unexpected strength in water utility spending on water technology solutions.
I say "unexpected" because water utilities are known for their conservatism. This has often frustrated investors because the potential for growth in smart meters and smart technology to reduce leakage and ensure quality water infrastructure is significant.
The growth potential is why investors have typically accorded Badger Meter and Xylem relatively high valuation multiples.
A valuation question
Still, with much of the good news already in the price -- and, as the analyst notes, Xylem is trading on 30 times its 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 it's definitely good news for residential spending and commercial water applications.
In summary, keep an eye on the stock because the dip might create a decent buying opportunity.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Roper Technologies. The Motley Fool has a disclosure policy.
