Supply Chain Flexibility And Focus On Education And Healthcare Markets Will Support Future Opportunities

Key Takeaways

• Cost reduction and supply chain flexibility enhance margins and earnings, focusing on North American institutional markets for core revenue growth.
  
• Strong cash flow and low leverage offer capital allocation options, including acquisitions, for potential revenue and earnings expansion.
  
• The company's focus on non-GAAP measures and market weaknesses could pose risks to revenue growth and margins amid cost concerns and interest rate pressures.

Catalysts

Engages in design, procurement, manufacture, and marketing of water management solutions in the United States, Canada, and internationally.

• Zurn Elkay Water Solutions is leveraging its business system for continuous improvement and cost reduction, leading to potential margin expansion and strengthening its earnings.
  
• The company is focused on high-growth institutional end markets, such as education and healthcare, in North America, which may drive higher core revenue growth rates.
  
• Reduced exposure to China and flexibility in the supply chain minimizes risk from tariffs, potentially protecting and enhancing net margins.
  
• Strong free cash flow generation and a low leverage position provide optionality for capital allocation, including potential acquisitions, which could drive future revenue and earnings growth.
  
• Successful execution of Elkay-related synergies and a focus on strategic growth initiatives are expected to continue contributing to core sales growth and improved EBITDA margins.

Zurn Elkay Water Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zurn Elkay Water Solutions's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.1% today to 12.9% in 3 years time.
• Analysts expect earnings to reach $226.2 million (and earnings per share of $1.29) by about April 2028, up from $158.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $194.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.1x on those 2028 earnings, up from 30.3x today. This future PE is greater than the current PE for the US Building industry at 17.7x.
• Analysts expect the number of shares outstanding to decline by 1.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.55%, as per the Simply Wall St company report.

Zurn Elkay Water Solutions Future Earnings Per Share Growth

Risks

• The reliance on non-GAAP measures and adjustments could present risks if investors perceive these adjustments as overly optimistic, potentially impacting perceptions of net margins and earnings.
  
• Despite strong performance in institutional and Waterworks markets, weaknesses in the residential market and parts of the Commercial segment could lead to a decline in overall revenue growth.
  
• The potential impact of emerging tariffs on materials, particularly from China, introduces uncertainty in cost management, which could affect net margins if price increases are not fully realizable.
  
• Concerns about the future impact of sustained high-interest rates may dampen overall growth in interest rate-sensitive markets, potentially affecting revenue and earnings growth.
  
• The company’s focus on share repurchases and dividends restricts capital availability for reinvestment in growth or potential acquisitions, posing a risk to future revenue and earnings expansion.

Valuation

• The analysts have a consensus price target of $37.429 for Zurn Elkay Water Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $29.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $226.2 million, and it would be trading on a PE ratio of 33.1x, assuming you use a discount rate of 7.6%.
• Given the current share price of $28.5, the analyst price target of $37.43 is 23.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.