Water management solutions company Zurn Elkay (NYSE:ZWS) announced better-than-expected revenue in Q4 CY2024, with sales up 3.9% year on year to $370.7 million. Its non-GAAP profit of $0.32 per share was 15% above analysts’ consensus estimates.
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Zurn Elkay (ZWS) Q4 CY2024 Highlights:
- Revenue: $370.7 million vs analyst estimates of $367.2 million (3.9% year-on-year growth, 0.9% beat)
- Adjusted EPS: $0.32 vs analyst estimates of $0.28 (15% beat)
- Adjusted EBITDA: $91 million vs analyst estimates of $89.87 million (24.5% margin, 1.3% beat)
- EBITDA guidance for the upcoming financial year 2025 is $412.5 million at the midpoint, in line with analyst expectations
- Operating Margin: 13.3%, up from 9.2% in the same quarter last year
- Organic Revenue fell 4% year on year (5% in the same quarter last year)
- Market Capitalization: $6.64 billion
Todd A. Adams, Chairman and Chief Executive Officer, commented, “2024 was another year of solid execution for us as we delivered record sales, EBITDA and cash flow performance while repurchasing $150 million of our shares and increasing our dividend 12.5% year over year. Despite pockets of challenging end markets, we achieved 4% pro forma core sales(1) growth, improved our adjusted EBITDA(1) margins by 270 basis points and made significant strides in the deployment of our strategies to deliver even better growth in the coming years. Our team's belief in and relentless deployment of the Zurn Elkay Business System positions us to continue to deliver above market growth and continued superior financial performance in 2025.”
Company Overview
Claiming to have saved more than 30 billion gallons of water, Zurn Elkay (NYSE:ZWS) provides water management solutions to various industries.
HVAC and Water Systems
Many HVAC and water systems companies sell essential, non-discretionary infrastructure for buildings. Since the useful lives of these water heaters and vents are fairly standard, these companies have a portion of predictable replacement revenue. In the last decade, trends in energy efficiency and clean water are driving innovation that is leading to incremental demand. On the other hand, new installations for these companies are at the whim of residential and commercial construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates.
Sales Growth
A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Over the last five years, Zurn Elkay’s demand was weak and its revenue declined by 5.3% per year. This was below our standards and is a tough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Zurn Elkay’s annualized revenue growth of 10.5% over the last two years is above its five-year trend, suggesting its demand recently accelerated. 
We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Zurn Elkay’s organic revenue averaged 1.2% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results. 
This quarter, Zurn Elkay reported modest year-on-year revenue growth of 3.9% but beat Wall Street’s estimates by 0.9%.
Looking ahead, sell-side analysts expect revenue to grow 3.3% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges.
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Adjusted Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Zurn Elkay has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 12.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Zurn Elkay’s operating margin rose by 1.1 percentage points over the last five years, showing its efficiency has improved.
This quarter, Zurn Elkay generated an operating profit margin of 13.3%, up 4.1 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.
Earnings Per Share
Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.
Sadly for Zurn Elkay, its EPS declined by more than its revenue over the last five years, dropping 8.4% annually. However, its operating margin actually expanded during this time, telling us that non-fundamental factors such as interest and taxes affected its ultimate earnings.
Diving into the nuances of Zurn Elkay’s earnings can give us a better understanding of its performance. A five-year view shows Zurn Elkay has diluted its shareholders, growing its share count by 39.8%. This dilution overshadowed its increased operating efficiency and has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals. 
Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.
For Zurn Elkay, its two-year annual EPS growth of 14.9% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.
In Q4, Zurn Elkay reported EPS at $0.32, up from $0.26 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Zurn Elkay’s full-year EPS of $1.28 to grow 5.3%.
Key Takeaways from Zurn Elkay’s Q4 Results
We enjoyed seeing Zurn Elkay exceed analysts’ revenue, EBITDA, and EPS expectations this quarter, even if some of the outperformance was slight. This is despite an organic revenue growth shortfall. The stock remained flat at $39.70 immediately after reporting.
So should you invest in Zurn Elkay right now? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.