Water management solutions company Zurn Elkay (NYSE:ZWS) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 2.9% year on year to $410 million. Its GAAP profit of $0.25 per share was 1.6% below analysts’ consensus estimates.
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Zurn Elkay (ZWS) Q3 CY2024 Highlights:
- Revenue: $410 million vs analyst estimates of $406.2 million (in line)
- EPS: $0.25 vs analyst expectations of $0.25 (1.6% miss)
- EBITDA: $105 million vs analyst estimates of $102.4 million (2.6% beat)
- EBITDA guidance for the full year is $388 million at the midpoint, above analyst estimates of $384.9 million
- Gross Margin (GAAP): 46.2%, up from 42.6% in the same quarter last year
- Operating Margin: 17.1%, up from 15.1% in the same quarter last year
- EBITDA Margin: 25.6%, up from 24.1% in the same quarter last year
- Free Cash Flow Margin: 21.2%, down from 24.8% in the same quarter last year
- Organic Revenue was up 3% year on year
- Market Capitalization: $6.16 billion
Todd A. Adams, Chairman and Chief Executive Officer, commented, “We delivered a solid quarter as both sales and margins exceeded the guidance we provided 90 days ago. Despite pockets of challenging end markets, our third quarter pro forma core sales(1) growth was 4% and adjusted EBITDA margins(1) grew by 150 basis points year over year to 25.6%. Free cash flow(1) continues to be exceptional as we generated $87 million of free cash flow(1) in the third quarter bringing our year to date total to $217 million. We continue to leverage our robust cash flow to invest in our business and return capital to shareholders as we cultivate the right M&A opportunities. In the quarter we deployed an additional $50 million of capital to repurchase 1.6 million shares, while increasing our quarterly dividend by 13% and reducing our net debt leverage(1) to an all-time low of 0.8x.”
Company Overview
Claiming to have saved more than 30 billion gallons of water, Zurn Elkay (NYSE:ZWS) provides water management solutions to various industries.
HVAC and Water Systems
Many HVAC and water systems companies sell essential, non-discretionary infrastructure for buildings. Since the useful lives of these water heaters and vents are fairly standard, these companies have a portion of predictable replacement revenue. In the last decade, trends in energy efficiency and clean water are driving innovation that is leading to incremental demand. On the other hand, new installations for these companies are at the whim of residential and commercial construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates.
Sales Growth
Reviewing a company’s long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Zurn Elkay struggled to generate demand over the last five years as its sales dropped by 5.4% annually, a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Zurn Elkay’s annualized revenue growth of 15% over the last two years is above its five-year trend, suggesting its demand recently accelerated. 
We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don’t accurately reflect its fundamentals. Over the last two years, Zurn Elkay’s organic revenue averaged 2.5% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline performance. 
This quarter, Zurn Elkay grew its revenue by 2.9% year on year, and its $410 million of revenue was in line with Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 2.9% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and shows the market thinks its products and services will face some demand challenges.
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Operating Margin
Zurn Elkay has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 13%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
Looking at the trend in its profitability, Zurn Elkay’s annual operating margin might have seen some fluctuations but has generally stayed the same over the last five years, highlighting the long-term consistency of its business.
In Q3, Zurn Elkay generated an operating profit margin of 17.1%, up 2 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.
Earnings Per Share
Analyzing revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.
Sadly for Zurn Elkay, its EPS by declined more than its revenue over the last five years, dropping 12.4% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Diving into the nuances of Zurn Elkay’s earnings can give us a better understanding of its performance. A five-year view shows Zurn Elkay has diluted its shareholders, growing its share count by 39.6%. This has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals. 
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.
For Zurn Elkay, its two-year annual EPS growth of 207% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.In Q3, Zurn Elkay reported EPS at $0.25, up from $0.24 in the same quarter last year. Despite growing year on year, this print slightly missed analysts’ estimates. Over the next 12 months, Wall Street expects Zurn Elkay’s full-year EPS of $0.79 to grow by 29.7%.
Key Takeaways from Zurn Elkay’s Q3 Results
It was good to see Zurn Elkay beat analysts’ revenue and EBITDA expectations this quarter. Looking ahead, full year guidance for EBITDA also outperformed Wall Street’s estimates. On the other hand, its organic revenue missed and its EPS fell short of Wall Street’s estimates. Overall, this was a mixed quarter. The stock remained flat at $35.92 immediately following the results.
Big picture, is Zurn Elkay a buy here and now?If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free.