Over the last six months, Zurn Elkay’s shares have sunk to $36.04, producing a disappointing 9.4% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Zurn Elkay, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Zurn Elkay Not Exciting?
Despite the more favorable entry price, we're cautious about Zurn Elkay. Here are three reasons why we avoid 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 1.8% 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. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Zurn Elkay’s revenue to rise by 3.5%, a slight deceleration versus its 5.2% annualized declines for the past five years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.
3. 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 8.4% 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.
Final Judgment
Zurn Elkay isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 26.5× forward P/E (or $36.04 per share). This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.
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