Zurn Elkay has had an impressive run over the past six months as its shares have beaten the S&P 500 by 7.6%. The stock now trades at $52.23, marking a 15.3% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Zurn Elkay, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Zurn Elkay Not Exciting?
We’re glad investors have benefited from the price increase, but we don't have much confidence in Zurn Elkay. Here are three reasons you should be careful with ZWS and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
In addition to reported revenue, organic revenue is a useful data point for analyzing HVAC and Water Systems companies. This metric gives visibility into Zurn Elkay’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Zurn Elkay’s organic revenue averaged 4.4% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Zurn Elkay, its EPS declined by 3% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Zurn Elkay’s margin dropped by 3.3 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Zurn Elkay’s free cash flow margin for the trailing 12 months was 18.7%.
Final Judgment
Zurn Elkay isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 31.1× forward P/E (or $52.23 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.
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