Zurn Elkay has had an impressive run over the past six months as its shares have beaten the S&P 500 by 18.7%. The stock now trades at $47.78, marking a 31.5% 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? Get the full stock story straight from our expert analysts, it’s free for active Edge members.
Why Is Zurn Elkay Not Exciting?
Despite the momentum, we're swiping left on Zurn Elkay for now. Here are three reasons there are better opportunities than ZWS and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
We can better understand HVAC and Water Systems companies by analyzing their organic revenue. 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 3.8% 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
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Zurn Elkay, its EPS and revenue declined by 4.5% and 3.5% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Zurn Elkay’s low margin of safety could leave its stock price susceptible to large downswings.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Zurn Elkay’s margin dropped by 16.5 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 17.4%.
Final Judgment
Zurn Elkay isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 29.9× forward P/E (or $47.78 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 suggest looking at the most dominant software business in the world.
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