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Neogen Corp. (NEOG)

December 27, 2024Overvalued

Compared to: Energy Recovery, Inc. (ERII) | Federal Signal Corp. (FSS) | iShares Core S&P Small Cap ETF (IJR)

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Evaluation summary
  1. Company Overview:

    • Zurn Elkay Water Solutions Corp. (ZWS) is a leading provider of water management solutions, serving institutional, commercial, waterworks, and residential end markets. The company designs, procures, manufactures, and markets a broad portfolio of specification-driven water management solutions, including water safety and control products, flow systems products, hygienic and environmental products, and filtered drinking water products. ZWS operates under the Zurn Elkay Business System (ZEBS), a continuous improvement framework to drive customer satisfaction and financial results. The company relies on an extensive network of independent sales representatives and distributors to sell and deliver its products.
    • ZWS's revenue is primarily generated from the institutional and commercial construction sectors. The company's product portfolio is diversified, with a significant contribution from drinking water solutions, which have been experiencing strong growth.
    • ZWS is being compared to Energy Recovery, Inc. (ERII) and Federal Signal Corp. (FSS) as industry peers. The iShares Core S&P Small Cap ETF (IJR) is used as a benchmark for performance comparison.
  2. Financial Performance:

    • ZWS has consistently delivered strong financial performance, with increasing revenue, profitability, and cash flow generation. Revenue has grown steadily, reaching $410 million in the third quarter of 2024. Net income has also increased significantly, reaching $43.5 million in the third quarter of 2024.
    • The company's gross profit margin has been expanding, reaching 42.59% in the third quarter of 2024, driven by effective cost management and increasing margins. The EBITDA margin has also been expanding, reaching 23.12% in the third quarter of 2024.
    • ZWS's profitability metrics are above industry averages. The company's Return on Assets (ROA) is 4.94%, Return on Equity (ROE) is 8.52%, and Return on Invested Capital (ROIC) is 6.30%, all exceeding the industry averages. This indicates strong efficiency in utilizing its assets and equity.
    • ZWS's strong financial performance is driven by its diversified product portfolio, focus on stable segments within the non-residential construction market, and effective cost management. The company's recent acquisition of Elkay Manufacturing Company has also contributed to its growth.
  3. Operational Efficiency:

    • ZWS is improving its operational efficiency through effective cost management and asset utilization. The company's working capital management is efficient, with a current ratio of 2.70 and a quick ratio of 1.71, both exceeding industry averages.
    • ZWS has been generating strong cash flows from its core business operations. Net operating cash flow has been increasing, reaching $90.9 million in the third quarter of 2024. The company's free cash flow margin has also been increasing, reaching 0.21 in the third quarter of 2024, indicating a strong ability to generate cash flow from its operations.
    • ZWS's capital expenditure has been relatively low, with $4.1 million in the third quarter of 2024. This suggests that the company is focused on optimizing its existing assets rather than making significant investments in new assets.
    • ZWS has been returning capital to shareholders through dividends and share repurchases. The company's dividend per share has been increasing, reaching $0.08 in the third quarter of 2024. The company has also been actively repurchasing shares, with $50 million in share repurchases in the third quarter of 2024.
    • ZWS's debt-to-equity ratio has been decreasing, reaching 34.94 in the third quarter of 2024. This indicates a strong ability to meet its financial obligations. The company's leverage ratio has also been decreasing, reaching 0.8 times in the third quarter of 2024, indicating a conservative capital structure.
  4. Growth Opportunities:

    • ZWS is well-positioned for continued growth, driven by its focus on stable segments within the non-residential construction market, strategic acquisitions, and innovation. The company's recent acquisition of Elkay Manufacturing Company has expanded its product portfolio and market reach.
    • ZWS is investing in R&D to develop new products and technologies. The company's R&D spending is not publicly available, but it is likely to be significant given the company's focus on innovation.
    • ZWS is expanding geographically, targeting new markets with high growth potential. The company's international operations are expected to contribute significantly to its future growth.
    • ZWS is focused on expanding the installed base of filtered bottle fillers and their filter attachment rate, driven by legislation such as Michigan's Filter First regulations. The company is also exploring opportunities in other states to implement similar legislation.
    • ZWS's capital allocation strategy is focused on a balanced approach, including dividend increases, share repurchases, and strategic acquisitions. The company's strong balance sheet provides flexibility for these initiatives.
  5. Recent Developments and Market Sentiment:

    • ZWS's recent earnings call highlighted the company's strong third-quarter 2024 results, exceeding guidance. The company's organic sales grew 4% on a pro forma core basis, reaching $410 million. Adjusted EBITDA increased 9% year-over-year to $105 million, resulting in a 25.6% adjusted EBITDA margin—the highest since the Elkay merger. This represents a 150 basis point year-over-year margin expansion and a 30 basis point sequential improvement. Free cash flow for the quarter was $87 million, with $50 million deployed for share repurchases. Net debt leverage decreased to a record low of 0.8 times. The company raised its dividend to $0.09 per quarter, a 12.5% increase.
    • The market sentiment towards ZWS is positive, driven by the company's strong financial performance, growth opportunities, and commitment to innovation. Analysts are optimistic about the company's future prospects, citing its strong market position, diversified product portfolio, and effective cost management.
  6. Risks and Threats:

    • ZWS faces risks related to cyclical markets, raw material cost volatility, and cybersecurity threats. The company's exposure to the construction industry makes it vulnerable to economic downturns.
    • ZWS's reliance on independent distributors and sales representatives could pose a risk to its sales and distribution channels. The company's potential inability to adequately protect its intellectual property could expose it to competitive threats.
    • ZWS's exposure to cybersecurity breaches and IT system failures could disrupt its operations and damage its reputation. The company's exposure to volatility in raw material costs and availability could impact its profitability.
    • ZWS's potential impairment of goodwill and intangible assets could negatively impact its financial performance. The company's compliance with environmental, health, and safety regulations could expose it to fines and penalties.
  7. Valuation Analysis:

    • ZWS's valuation metrics are in line with industry averages. The company's Enterprise Value to EBITDA (EV/EBITDA) is 19.23, and its Enterprise Value to Sales (EV/Sales) is 4.24, both comparable to industry averages.
    • ZWS's valuation is supported by its strong financial performance, growth opportunities, and commitment to innovation. The company's recent earnings call highlighted its strong third-quarter 2024 results, exceeding guidance. The company's organic sales grew 4% on a pro forma core basis, reaching $410 million. Adjusted EBITDA increased 9% year-over-year to $105 million, resulting in a 25.6% adjusted EBITDA margin—the highest since the Elkay merger. This represents a 150 basis point year-over-year margin expansion and a 30 basis point sequential improvement. Free cash flow for the quarter was $87 million, with $50 million deployed for share repurchases. Net debt leverage decreased to a record low of 0.8 times. The company raised its dividend to $0.09 per quarter, a 12.5% increase.
  8. Price Performance:

    • ZWS's stock price has been increasing in recent months, driven by the company's strong financial performance and positive market sentiment. The stock price has increased by over 10% in the past month and over 20% in the past three months.
    • ZWS has consistently outperformed the iShares Core S&P Small Cap ETF (IJR) across all historical periods analyzed. This outperformance is particularly notable over longer periods, such as the 2-year and 3-year periods, where ZWS has generated significantly higher returns. While ZWS has experienced some periods of underperformance, such as in the 1-month period, its overall performance has been consistently better than IJR.
    • ZWS has also outperformed Energy Recovery, Inc. (ERII) across all historical periods analyzed. This suggests that ZWS has been able to generate higher returns for the level of risk it takes on.
  9. Future Outlook:

    • ZWS's management is optimistic about the company's future prospects, citing strong projections for starts in key verticals in 2025 and the lag effect of construction projects. The company expects to continue executing restructuring actions to optimize operations and manufacturing footprint.
    • Analysts are also optimistic about ZWS's future prospects, citing its strong market position, diversified product portfolio, and effective cost management. The company's recent earnings call highlighted its strong third-quarter 2024 results, exceeding guidance. The company's organic sales grew 4% on a pro forma core basis, reaching $410 million. Adjusted EBITDA increased 9% year-over-year to $105 million, resulting in a 25.6% adjusted EBITDA margin—the highest since the Elkay merger. This represents a 150 basis point year-over-year margin expansion and a 30 basis point sequential improvement. Free cash flow for the quarter was $87 million, with $50 million deployed for share repurchases. Net debt leverage decreased to a record low of 0.8 times. The company raised its dividend to $0.09 per quarter, a 12.5% increase.
  10. Summary:

    • ZWS is a financially healthy company with strong growth prospects. The company's strong financial position, operational efficiency, and growth opportunities position it well for continued success in the future.
    • ZWS's strengths include its diversified product portfolio, focus on stable segments within the non-residential construction market, effective cost management, and strong financial performance.
    • ZWS's weaknesses include its exposure to cyclical markets, reliance on independent distributors and sales representatives, and potential inability to adequately protect its intellectual property.
    • ZWS's opportunities include expanding geographically, investing in R&D to develop new products and technologies, and capitalizing on the growing demand for water safety and conservation solutions.
    • ZWS's threats include economic downturns, raw material cost volatility, cybersecurity threats, and competition from other water management companies.
    • ZWS's valuation is in line with industry averages, and its stock price has been increasing in recent months. The company's future outlook is positive, driven by its strong market position, diversified product portfolio, and effective cost management.
    • Investors should monitor ZWS's exposure to cyclical markets, raw material cost volatility, and cybersecurity threats. The company's reliance on independent distributors and sales representatives should also be monitored.
    • Overall, ZWS is a well-managed company with a strong track record of financial performance and growth. The company is well-positioned to capitalize on the growing demand for water management solutions. Investors should consider ZWS as a potential investment opportunity, but they should also be aware of the company's risks.
Price history
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Fundamentals
Insights
  • Zurn Elkay Water Solutions Corp (ZWS) is a growth-oriented, pure-play water management business with a diverse and innovative product portfolio, serving attractive end markets.
  • The company has a strong liquidity position, as evidenced by its increasing cash and short-term investments.
  • The company has a strong solvency position, as evidenced by its decreasing debt levels.
  • The company's profitability is strong and improving, driven by effective cost management and increasing margins.
  • The company's free cash flow margin has been increasing, indicating a strong ability to generate cash flow from its operations.
  • The company's future cash flows are expected to be strong, as evidenced by its strong operating cash flow generation and decreasing debt obligations.
  • The company's free cash flow is expected to continue to increase, providing flexibility for future investments and shareholder returns.
  • The company's exposure to cyclical construction and waterworks markets is a significant risk factor.
  • The company's reliance on independent distributors and sales representatives could pose a risk to its sales and distribution channels.
  • The company's potential inability to adequately protect its intellectual property could expose it to competitive threats.
  • The company's exposure to cybersecurity breaches and IT system failures could disrupt its operations and damage its reputation.
  • The company's exposure to volatility in raw material costs and availability could impact its profitability.
  • The company's potential impairment of goodwill and intangible assets could negatively impact its financial performance.
  • The company's compliance with environmental, health, and safety regulations could expose it to fines and penalties.
  • Overall, Zurn Elkay Water Solutions Corp (ZWS) is a financially healthy company with strong growth prospects. The company's strong liquidity, solvency, and profitability positions it well for continued success in the future. However, the company's exposure to cyclical markets and other risk factors should be carefully monitored.
Analysis
  • Revenue - The company has been experiencing consistent revenue growth, driven by the Elkay acquisition and its focus on stable segments within the non-residential construction market. - The company's revenue growth is positive and sustainable, driven by its diversified product portfolio and focus on stable segments within the non-residential construction market. - The company's revenue growth is expected to be positive in the future, driven by its diversified product portfolio and focus on stable segments within the non-residential construction market.
    • Profitability
      • The company's profitability is strong and improving, driven by effective cost management and increasing margins.
      • The company's return on assets, return on equity, return on total capital, and return on invested capital are all above the industry average, indicating strong profitability relative to its assets and equity.
      • The company's profitability is expected to continue to improve in the future, driven by its strong revenue growth and effective cost management.
    • Liquidity
      • The company has a strong liquidity position, as evidenced by its increasing operating cash flow and current ratio.
      • The company's quick ratio is also above the industry average, indicating a strong ability to meet short-term obligations.
      • The company's liquidity position is expected to remain strong in the future, driven by its strong cash flow generation and conservative capital structure.
    • Solvency
      • The company has a strong solvency position, as evidenced by its decreasing debt levels and debt-to-equity ratio.
      • The company's debt-to-EBITDA ratio is below the industry average, indicating a conservative capital structure.
      • The company's solvency position is expected to remain strong in the future, driven by its strong free cash flow generation and conservative capital structure.
    • Operational Efficiency
      • The company's asset utilization efficiency is improving, as evidenced by its decreasing inventories and fixed assets.
      • The company's strong profitability and cash flow generation indicate that it is effectively utilizing its assets to generate revenue.
      • The company's efficiency is expected to continue to improve in the future, driven by its focus on cost optimization and operational excellence.
    • Cash Flow Analysis
      • The company has been generating strong cash flows from its core business operations, as evidenced by the increasing net income, depreciation, and funds from operations.
      • The company's free cash flow margin has been increasing, indicating a strong ability to generate cash flow from its operations.
      • The company's future cash flows are expected to be strong, as evidenced by its strong operating cash flow generation and decreasing debt obligations.
      • The company's free cash flow is expected to continue to increase, providing flexibility for future investments and shareholder returns.
    • Risk Factors
      • The company's exposure to cyclical construction and waterworks markets is a significant risk factor.
      • The company's reliance on independent distributors and sales representatives could pose a risk to its sales and distribution channels.
      • The company's potential inability to adequately protect its intellectual property could expose it to competitive threats.
      • The company's exposure to cybersecurity breaches and IT system failures could disrupt its operations and damage its reputation.
      • The company's exposure to volatility in raw material costs and availability could impact its profitability.
      • The company's potential impairment of goodwill and intangible assets could negatively impact its financial performance.
      • The company's compliance with environmental, health, and safety regulations could expose it to fines and penalties.
    • Future Outlook
      • The company is well-positioned for continued growth, driven by its diversified product portfolio, focus on stable segments within the non-residential construction market, and strong profitability.
      • The company's strong liquidity and solvency positions provide flexibility for future investments and shareholder returns.
      • The company's focus on operational excellence and cost optimization is expected to continue to drive profitability and efficiency.
Financial statements
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Public filings
  • Zurn Elkay has transformed into a focused, pure-play water management business with a diverse and innovative product portfolio, serving attractive end markets
  • The Elkay acquisition significantly expanded the company's drinking water and commercial sink offerings, complementing its existing water safety, flow, and environmental product lines
  • Divestiture of the Zurn Industries asbestos liabilities removed a major contingent liability and risk factor for the business
  • Operational initiatives like the ZEBS framework and restructuring actions have driven margin expansion and improved financial performance
  • The company maintains a strong liquidity position and has been actively returning capital to shareholders through share repurchases
  • Key risks include exposure to cyclical construction markets, raw material cost volatility, cybersecurity threats, and potential impairment of intangible assets
  • Overall, Zurn Elkay appears well-positioned to capitalize on growth opportunities in the water management industry through its diversified product portfolio, operational excellence, and strategic M&A

Core Business and Operations:

  • Zurn Elkay Water Solutions Corp is a growth-oriented, pure-play water management business that designs, procures, manufactures, and markets a broad portfolio of specification-driven water management solutions
  • Key product categories include water safety and control products, flow systems products, hygienic and environmental products, and filtered drinking water products
  • Serves institutional, commercial, waterworks, and residential end markets, with a focus on the institutional and commercial construction sectors
  • Operates under the Zurn Elkay Business System (ZEBS), a continuous improvement framework to drive customer satisfaction and financial results
  • Relies on an extensive network of independent sales representatives and distributors to sell and deliver products

Industry and Market Trends:

  • Demand driven by new construction, retrofits, and infrastructure projects in institutional, commercial, and waterworks markets
  • Highly specification-driven industry with stringent regulatory, building, and plumbing code requirements
  • Increasing focus on water safety, conservation, hygiene, and elimination of plastic water bottles
  • Relatively fragmented industry with opportunities for consolidation and market share gains

Recent Events:

  • Completed the acquisition of Elkay Manufacturing Company in July 2022, expanding the company's drinking water and commercial sink product portfolio
  • Divested Zurn Industries and its asbestos liabilities in December 2023, removing a significant contingent liability
  • Executed various restructuring initiatives to optimize operations and manufacturing footprint

Risk Factors:

  • Exposure to cyclical construction and waterworks markets
  • Reliance on independent distributors and sales representatives
  • Potential inability to adequately protect intellectual property
  • Risks related to cybersecurity breaches and IT system failures
  • Volatility in raw material costs and availability
  • Potential impairment of goodwill and intangible assets
  • Compliance with environmental, health, and safety regulations

Legal Matters:

  • Previously subject to asbestos-related litigation, which was resolved through the divestiture of Zurn Industries
  • Ongoing tax examinations and indemnification obligations related to prior divestitures

Management's Discussion and Analysis:

  • Reported strong financial performance in 2023 and 2024, with growth in core sales, operating margins, and net income
  • Benefited from synergies and cost savings from the Elkay acquisition, as well as productivity initiatives
  • Maintained a strong liquidity position with ample cash and borrowing capacity under credit facilities
  • Actively repurchased shares under the company's stock buyback program
  • Expects to continue executing restructuring actions to optimize operations and manufacturing footprint
Earnings calls

Earnings Report 2024Q3 (2024-10-30)

Key takeaways
  1. Strong Financial Performance and Upward Guidance Revision: ZWS delivered exceptional Q3 results, exceeding expectations and leading to a significant upward revision of full-year guidance. This demonstrates strong operational execution and a positive outlook.
  2. Resilient Revenue Streams and Market Positioning: The company's diversified product portfolio and strategic focus on stable segments within the non-residential construction market contribute to revenue resilience and mitigate risks associated with market fluctuations.
  3. Sustainable Margin Expansion and Cost Management: The company's commitment to operational efficiency, the Zurn Elkay Business System, and supply chain optimization are driving sustainable margin expansion, creating a strong foundation for future profitability.
  4. Positive Outlook for 2025 and Beyond: While acknowledging the complexities of the construction industry, management expressed high confidence in improving core growth in 2025 and beyond, driven by positive projections for starts in key verticals and the lag effect of construction projects.
  5. Strategic Capital Allocation and M&A Potential: ZWS's strong balance sheet provides flexibility for a balanced capital allocation strategy, including dividend increases, share repurchases, and strategic acquisitions. The company's focus on accretive M&A within its core competencies positions it for continued growth.
  6. Michigan's Filter First Legislation and Similar Initiatives: The successful implementation of Michigan's Filter First legislation and the potential for similar initiatives in other states represent significant growth opportunities for ZWS's drinking water solutions.
Focus of management’s prepared remarks
  • Strong Q3 Results and Raised Full-Year Outlook: The third quarter exceeded expectations across all key metrics, leading to an upward revision of the full-year guidance for sales, EBITDA margin, and free cash flow. Specific figures were provided for each metric.
  • EBITDA Margin Expansion: Significant emphasis was placed on the 150 basis point year-over-year EBITDA margin expansion in Q3, reaching 25.6%, the highest since the Elkay merger. This was attributed to productivity initiatives, the Zurn Elkay Business System, and synergy realization. A further increase in margin expansion for the full year was also projected.
  • Capital Allocation: The company highlighted its balanced capital allocation strategy, including share repurchases ($50 million in Q3, $130 million year-to-date), dividend increases (12.5% increase to $0.09 per quarter), and M&A opportunities. Low leverage (0.8 times) was emphasized as providing flexibility.
  • Sustainability Initiatives: The company showcased its sustainability efforts and their positive impact on both the environment and customer relationships, particularly in relation to clean drinking water initiatives and disaster relief efforts.
  • Long-Term Growth Algorithm and Market Analysis: Management detailed their long-term growth algorithm (market growth + price + breakthroughs) and provided a comprehensive analysis of market indicators (Dodge Momentum Index, ABI, construction backlog, and Dodge Starts data) to support their positive outlook for 2025 and beyond. They emphasized their over-indexing to stable and less interest-rate-sensitive segments of the non-residential construction market.
  • Construction Cycle and Lag Effect: A detailed explanation of the 18-month average construction cycle and its impact on the company's sales was provided, highlighting the lag effect between construction starts and revenue recognition. This was illustrated graphically to show the contribution of starts from prior years to current-year sales.
Focus of the analyst Q&A
  • Product Category Growth and Q4 Outlook: Analysts sought a breakdown of growth rates across different product categories in Q3 and Q4, specifically inquiring about the drivers behind the low single-digit guidance for Q4. The relative performance of drinking water solutions was also a point of interest.
  • Drinking Water Growth Sustainability and Michigan's Filter First Impact: Analysts questioned the sustainability of double-digit growth in drinking water solutions and sought quantification of the potential benefits from Michigan's Filter First legislation and similar initiatives in other states.
  • Gross Margin Sustainability and Long-Term Goals: Analysts inquired about the drivers of strong gross margins, their sustainability, and the company's long-term gross margin targets.
  • Margin Differential Across Construction Stages: Analysts sought clarification on whether there were margin differentials across the various stages of the 18-month construction process.
  • Customer Hesitancy and Project Delays: Analysts explored whether the company had observed any increase in pauses or hesitancy among customers in completing projects.
  • Pricing Expectations for 2025: Analysts sought clarification on the company's pricing expectations for 2025, considering that net price increases this year were below the long-term algorithm.
  • Incremental Margins and Supply Chain Savings: Analysts sought clarification on whether supply chain savings should be considered additive to or inclusive of the projected 30% to 35% normalized incremental margins.
  • Bottle Filler Market Penetration: Analysts requested an update on the penetration rate of bottle fillers in the U.S. and sought an estimation of the maximum potential penetration.
  • Construction Cycle Timing and 2025 Outlook: Analysts attempted to triangulate the Dodge Starts data with the company's construction cycle illustration to understand the timing of potential tailwinds from increased starts in education and healthcare.
  • Balance Sheet Usage and M&A Priorities: Analysts inquired about the company's plans for using its strong balance sheet, including dividend increases, share repurchases, and M&A activity. Specific questions were raised about the M&A pipeline, priorities, and the types of acquisitions being considered.
  • Education and Healthcare Growth Drivers: Analysts sought further clarification on the drivers of the expected increase in starts in the education and healthcare sectors in 2025, considering the impact of ESSER funding.
  • Construction Cycle Granularity and Share Gain: Analysts requested more granular details on the performance of different segments within the construction cycle (flow systems) and sought insights into whether the company had gained market share during the quarter.
  • EBITDA Margin Progression and Mixed Dynamics: Analysts explored the structural versus discretionary components of cost management efforts, the potential for changes in discretionary costs, and the impact of mixed dynamics (institutional versus commercial) on future EBITDA margin progression.
Summary
  1. Financial Performance

Zurn Elkay Water Solutions Corp (ZWS) reported strong third-quarter 2024 results, exceeding guidance. Organic sales grew 4% on a pro forma core basis, reaching $410 million. Adjusted EBITDA increased 9% year-over-year to $105 million, resulting in a 25.6% adjusted EBITDA margin—the highest since the Elkay merger. This represents a 150 basis point year-over-year margin expansion and a 30 basis point sequential improvement. Free cash flow for the quarter was $87 million, with $50 million deployed for share repurchases. Net debt leverage decreased to a record low of 0.8 times. The company raised its dividend to $0.09 per quarter, a 12.5% increase.

  1. Revenue Drivers

Mid-single-digit core sales growth in non-residential markets was partially offset by flattish year-over-year sales in residential markets and certain commercial segments within non-residential. Drinking water solutions continued to perform exceptionally well, exhibiting double-digit growth in installed filtered bottle fillers. The company highlighted its over-indexing to stable segments within the non-residential construction market (education and healthcare in institutional, and office, retail, and hospitality in commercial). The company's broad product portfolio, spanning various stages of the construction process (flow systems, water safety and control, hygienic and environmental, and drinking water), contributes to revenue resilience.

  1. Profit Margins and Cost Management

The strong margin expansion was attributed to productivity initiatives, the Zurn Elkay Business System, continuous improvement activities, and the realization of Elkay-related synergies. Management highlighted the sustainability of current gross margins, citing the Zurn Elkay Business System and favorable product mix. They expressed confidence in achieving a 50% gross margin over time. Supply chain repositioning is expected to contribute an additional $5 million to $10 million to EBITDA at full run rate, starting in 2025. The company projects 30% to 35% incremental margins going forward, with supply chain savings considered additional to this figure.

  1. Guidance and Outlook

ZWS raised its full-year outlook. Fourth-quarter 2024 core sales growth is projected in the low single digits, with adjusted EBITDA expected between $88 million and $90 million. Full-year 2024 pro forma core sales growth is anticipated in the low single digits, with adjusted EBITDA margin expansion projected between 250 and 270 basis points year-over-year. Full-year free cash flow is expected to be approximately $260 million. Management expressed high confidence in improving core growth over the next couple of years, citing strong projections for starts in key verticals in 2025 and the lag effect of construction projects. Potential risks include the actualization of projected starts and potential tariff implications.

  1. Strategic Initiatives

Key strategic initiatives include continuous improvement through the Zurn Elkay Business System, supply chain repositioning, and a balanced capital allocation strategy encompassing dividend increases, share repurchases, and M&A. The company is focused on expanding the installed base of filtered bottle fillers and their filter attachment rate, driven by legislation such as Michigan's Filter First regulations. Management highlighted the company's broad product portfolio and its resilience across various market conditions.

  1. Management Commentary

Management expressed confidence in the company's performance and outlook. They emphasized the resilience of their end markets and their unique exposure to stable verticals. The tone was positive, highlighting strong financial results, margin expansion, and future growth prospects. Management noted the complexity of the non-residential construction industry and the lag effect between starts and sales. They also emphasized the importance of their detailed views of specific regions, channels, and customers in managing the business.

  1. Industry and Market Conditions

The company analyzed various market indicators, including the Dodge Momentum Index, the Architectural Billings Index (ABI), and construction backlog data. While acknowledging the variability and complexities of the non-residential construction market, management highlighted the positive projections for starts in their key verticals in 2025 as a positive signal. They emphasized their over-indexing to stable segments within the institutional and commercial markets. The company also noted the impact of factors such as weather, regional migration, and supply chain challenges on the construction cycle. The impact of legislation mandating water filtration in schools was also discussed.

Comparative analysis
Benchmarks (as of 2024-12-26)
iShares Core S&P Small Cap ETF (IJR)
  • Performance Comparison: Zurn Elkay Water Solutions Corp. (ZWS) has consistently outperformed the iShares Core S&P Small Cap ETF (IJR) across all historical periods analyzed. This outperformance is particularly notable over longer periods, such as the 2-year and 3-year periods, where ZWS has generated significantly higher returns. While ZWS has experienced some periods of underperformance, such as in the 1-month period, its overall performance has been consistently better than IJR.
  • Risk and Return Analysis: ZWS has delivered higher annualized returns than IJR across all periods. However, this higher return comes with a higher level of risk. ZWS has exhibited significantly higher annualized volatility than IJR, indicating a greater degree of price fluctuations. This higher volatility is also reflected in the drawdown figures, where ZWS has experienced larger maximum drawdowns than IJR. This suggests that ZWS is more susceptible to significant price declines and may take longer to recover from market downturns.
  • Risk-Adjusted Performance: Despite its higher volatility, ZWS has generally offered a better risk-adjusted return than IJR, as evidenced by its consistently higher Sharpe Ratio. This suggests that ZWS has been able to generate higher returns relative to the risk it takes. However, it's important to note that the Sharpe Ratio can fluctuate, and there have been periods where IJR has outperformed ZWS on a risk-adjusted basis.
  • Overall Assessment: ZWS has demonstrated strong historical performance, consistently outperforming IJR across various periods. However, this outperformance comes with a higher level of risk, as evidenced by its higher volatility and larger drawdowns. Despite the higher risk, ZWS has generally offered a better risk-adjusted return than IJR, as indicated by its higher Sharpe Ratio. Investors seeking higher potential returns should consider ZWS, but they should also be aware of its higher risk profile. Conversely, investors seeking a more conservative approach may prefer IJR, which offers lower volatility and smaller drawdowns, although with potentially lower returns.
Peers Price History(as of 2024-12-26)
  • Performance Comparison: ZWS has consistently outperformed ERII over all periods, demonstrating strong performance. There is no data available for FSS.
  • Risk and Return Analysis: ZWS has generated higher annualized returns than ERII over all periods, indicating strong growth potential. However, ZWS has also exhibited higher annualized volatility than ERII, suggesting a higher risk profile.
  • Risk-Adjusted Performance: ZWS has consistently shown a higher Sharpe ratio than ERII, indicating better risk-adjusted returns. This suggests that ZWS is able to generate higher returns for the level of risk it takes on.
  • Overall Assessment: ZWS has demonstrated strong performance and risk-adjusted returns compared to ERII. However, ZWS's higher volatility suggests a higher risk profile. Investors should consider their risk tolerance and investment goals when evaluating ZWS.
Peers Fundamentals(as of 2024-09-30)
  1. Market Position and Size:

    • ZWS is the largest company in the peer group based on market capitalization, with a market cap of 6457.62, significantly larger than ERII's market cap of 878.83 and FSS's market cap of 5744.61.
    • ZWS's market cap is more closely aligned with its profitability metrics compared to its peers, suggesting a stronger correlation between market value and financial performance.
  2. Profitability and Efficiency:

    • ZWS's profitability metrics are mixed. While it outperforms its peers and the industry average in some areas, it underperforms in others.
    • ZWS's profitability is not as strong as expected given its size and revenue, indicating potential areas for improvement.
    • ZWS's efficiency in generating returns is mixed. While it outperforms its smaller peer and the industry average, it underperforms its larger peer. This suggests that ZWS may have opportunities to improve its efficiency and generate higher returns.
  3. Financial Health and Stability:

    • ZWS's liquidity and solvency metrics are mixed. While its short-term liquidity is relatively strong, its high debt levels compared to its peers raise concerns about its financial stability.
    • ZWS's balance sheet structure is somewhat conservative, with a moderate level of debt compared to its peers.
  4. Valuation and Market Perception:

    • ZWS's valuation metrics are mixed. While it is valued more favorably than its smaller peer and the industry average, it is valued less favorably than its larger peer.
    • The market may be assigning a higher premium to ZWS's size and growth potential but may be discounting its profitability and efficiency compared to its larger peer.
  5. Cash Flow and Capital Management:

    • ZWS's cash flow generation strength is relatively strong, but it may have opportunities to improve its efficiency.
    • ZWS's cash flow generation is not significantly higher than its smaller peer, ERII, despite being the largest company in the peer group.
  6. Growth and Future Prospects:

    • ZWS's growth trends are mixed compared to the peer group average. ZWS exhibits consistently higher growth in some areas but consistently lower growth in others.
    • ZWS's year-over-year growth rates exhibit significant fluctuations, suggesting that its growth may be volatile.
    • ZWS's growth may be slowing down in some key areas, while accelerating in others.
    • ZWS's growth is concentrated in specific areas, particularly free cash flow and free cash flow margin.
    • ZWS's growth in profitability metrics is not as strong as its growth in cash flow, which may be a potential red flag.
  7. Potential for Investment:

    • ZWS's investment attractiveness is mixed. While it exhibits some strengths, it also has some weaknesses that require attention.
    • Investors should carefully consider ZWS's growth trajectory, profitability, and financial stability before making any investment decisions.
  8. Key Risks and Considerations:

    • ZWS's high debt levels compared to its peers raise concerns about its financial stability.
    • ZWS's slower revenue growth compared to the peer group average indicates potential challenges in expanding its market share.
    • ZWS's growth in profitability metrics is not as strong as its growth in cash flow, which may be a potential red flag.
  9. Overall Assessment:

    • ZWS's overall financial position is mixed. While it exhibits some strengths, it also has some weaknesses that require attention.
    • ZWS's performance is not consistently superior to its peers, despite being the largest company in the peer group.
    • ZWS's future prospects are uncertain, with potential for growth but also risks associated with its debt levels and slower revenue growth.
Comparison metrics