Zurn Elkay has been treading water for the past six months, holding steady at $32.81.

Is there a buying opportunity in Zurn Elkay, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

We're sitting this one out for now. Here are three reasons why ZWS doesn't excite us and a stock we'd rather own.

Why Is Zurn Elkay Not Exciting?

Claiming to have saved more than 30 billion gallons of water, Zurn Elkay (NYSE: ZWS) provides water management solutions to various industries.

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 1.2% 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 declined by 8.3% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Zurn Elkay historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.1%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

Final Judgment

Zurn Elkay isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 24.4× forward price-to-earnings (or $32.81 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better investment opportunities out there. We’d recommend looking at one of our top software and edge computing picks.

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