Why Xylem Stock Slipped Today

Shares of Xylem (NYSE: XYL) , the water infrastructure specialist, were falling today after the company beat analyst estimates in its second-quarter earnings report, but it still wasn't enough to live up to the stock's high valuation.

As a result, the stock finished the day down 5.7% on Tuesday.

Xylem's results were strong but weren't enough

Revenue in the quarter jumped 26% or 9% organically, reaching $2.17 billion and topping estimates of $2.14 billion. The organic results exclude the impact of its acquisition of Evoqua Water Technologies.

Management pointed to execution and demand that were strong, as were bottom-line results as net margins expanded by 8.9%. Adjusted earnings per share (EPS) increased 11% to $1.09, beating the consensus at $1.05.

CEO Matthew Pine said: "Healthy demand, combined with the team's disciplined operational execution, delivered significant margin expansion in the quarter. Evoqua integration and synergies are also well on track."

What's next for Xylem

The water stock also raised its guidance for the full year, calling for revenue of $8.55 billion, up 16% on a reported basis and 5% to 6% on an organic basis, a slight improvement from its previous forecast. That was slightly below the analyst consensus at $8.56 billion.

It also forecast a margin based on adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) of 20.5%, up from 20% previously, and sees adjusted EPS of $4.18 to $4.28, better than its earlier range of $4.10 to $4.25. The new range is slightly ahead of the average analyst estimate of $4.21.

Xylem might have gained on today's news, but the stock was already up roughly 20% year to date and trades at a forward price-to-earnings ratio of more than 30. While the business still looks strong after today's report, the sell-off is understandable given the valuation.

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