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Water management solutions company Zurn Elkay (NYSE:ZWS) reported results in line with analysts' expectations in Q2 CY2024, with revenue up 2.2% year on year to $412 million. It made a GAAP profit of $0.27 per share, improving from its profit of $0.20 per share in the same quarter last year.
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Zurn Elkay (ZWS) Q2 CY2024 Highlights:
- Revenue: $412 million vs analyst estimates of $409.2 million (small beat)
- EPS: $0.27 vs analyst estimates of $0.25 (9.7% beat)
- Gross Margin (GAAP): 45.2%, up from 43% in the same quarter last year
- Free Cash Flow of $80.2 million, up 59.8% from the previous quarter
- Organic Revenue was up 2% year on year
- Market Capitalization: $5.57 billion
Claiming to have saved more than 34 billion gallons of water due to its systems, Zurn Elkay (NYSE:ZWS) provides water management solutions to various industries.
HVAC and Water SystemsTraditionally, home construction materials companies have built economic moats with expertise in specialized areas, brand recognition, and strong relationships with contractors. More recently, advances to address labor availability and job site productivity have spurred innovation that is driving incremental demand. However, these companies are at the whim of residential construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of home construction materials companies.
Sales GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Zurn Elkay's demand was weak over the last five years as its sales fell by 5.6% annually, a rough 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 25% over the last two years is above its five-year trend, suggesting its demand recently accelerated.
Zurn Elkay also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, Zurn Elkay's organic revenue averaged 2.3% 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 performance.
This quarter, Zurn Elkay grew its revenue by 2.2% year on year, and its $412 million of revenue was in line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 3.3% over the next 12 months, an acceleration from this quarter.
Operating MarginOperating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It's also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Zurn Elkay has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 13.1%. 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 annual operating margin decreased by 1.8 percentage points over the last five years. Even though its margin is still high, shareholders will want to see Zurn Elkay become more profitable in the future.
This quarter, Zurn Elkay generated an operating profit margin of 17.5%, up 3.9 percentage points year on year. This increase was encouraging, and since the company's operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as sales, marketing, R&D, and administrative overhead.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Sadly for Zurn Elkay, its EPS declined more than its revenue over the last five years, dropping by 12.5% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
We can take a deeper look into Zurn Elkay's earnings to better understand the drivers of its performance. As we mentioned earlier, Zurn Elkay's operating margin improved this quarter but declined by 1.8 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower 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 also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Zurn Elkay, its two-year annual EPS growth of 23% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.
In Q2, Zurn Elkay reported EPS at $0.27, up from $0.20 in the same quarter last year. This print beat analysts' estimates by 9.7%. Over the next 12 months, Wall Street expects Zurn Elkay to grow its earnings. Analysts are projecting its EPS of $0.78 in the last year to climb by 26.2% to $0.98.
Key Takeaways from Zurn Elkay's Q2 Results It was good to see Zurn Elkay beat analysts' revenue and EPS expectations this quarter. On the other hand, its organic revenue missed, meaning its revenue outperformance came from acquisitions. Overall, this was a decent quarter for Zurn Elkay. The stock remained flat at $32.24 immediately after reporting.
