ZWS

Zurn Elkay Water Solutions (ZWS) Analyst Note

Date: 2026-06-20 Current Price: $49.98

1. Structural Readiness

State: Forming Conservative Entry: — (Awaiting confirmed breakout above the coil high) Aggressive/Pre-Breakout Entry: — (Not actionable on setup alone; requires confirmation) Breakout Level: — (Pending confirmation of price action above the coil resistance) Current Price: $49.98 Extension: — (No extension calculated as the breakout has not fired) ATR Context: Current ATR is 2.7% (Productive). This sits within the historical "productive" range, suggesting sufficient volatility for position sizing without the elevated risk of extreme volatility (>8%).

2. Thesis Layer

Thesis Classification: TACTICAL / Setup-Led Secular Exposure: None named at this date. Analysis: As of June 20, 2026, ZWS is not being analyzed through a specific named macro or secular thesis lens (e.g., "Water Scarcity Play" or "Green Infrastructure Boom"). The investment case is strictly setup-led, relying on the quality of the technical structure combined with the underlying business fundamentals. The conviction is derived from the alignment of a high-quality business archetype with a constructive technical formation, rather than a top-down macro narrative.

3. Business Overview

Company Description: Zurn Elkay Water Solutions Corporation is a growth-oriented, pure-play water management business. It designs, procures, manufactures, and markets specification-driven water management solutions focused on health, hydration, human safety, and environmental impact. Business Model: The company operates a broad product portfolio serving institutional, commercial, and waterworks end-users. Key segments include:

• Water Safety and Control: Professional-grade safety products.
• Flow Systems: Hygienic and environmental products.
• Drinking Water: Filtered drinking water products for public and private spaces.
• Strategy: The company has executed an "80/20" strategy, exiting low-margin products to focus on higher-value specification-driven solutions.

Supporting Evidence (as of 2026-06-20):

• Growth & Margins: In Q1 2026, net sales grew 11% year-over-year to $433.0 million (E10). Core sales improved 11% (E11). Adjusted EBITDA grew 18% to $116 million, with margins expanding 160 basis points to 26.8% (E7).
• Guidance: Management projects Q2 2026 core sales growth of 8% to 9% and adjusted EBITDA margins between 27% and 27.5% (E1).
• Cash Flow: The company anticipates full-year 2026 free cash flow of approximately $335 million (E2).
• Product Performance: The "Drinking Water" segment performed well, with the installed base of filtered bottle fillers growing at double-digit rates and the filtration piece growing above double digits (E4).
• Balance Sheet: As of March 31, 2026, the Total Net Leverage Ratio was 0.57 to 1.00, indicating a very strong balance sheet (E15). The revolving credit facility was increased to $550.0 million with a maturity extension to 2031 (E14).
• Backlog: As of December 31, 2025, 100% of the backlog was scheduled to ship during 2026 (E22).

4. Archetype and Conviction

Archetype: Quality Compounder Rationale: The company fits the "Quality Compounder" archetype due to its consistent margin expansion, strong free cash flow generation, and strategic portfolio optimization.

• Margin Inflector: Adjusted EBITDA margins have improved 630 basis points on a trailing 12-month basis from Q1 2023 to Q1 2026, and 730 basis points over the last 13 quarters (E6). This demonstrates a sustained ability to improve profitability through price realization and productivity initiatives (E12).
• Structural Quality: The business is insulated from residential construction cycles, relying on more stable institutional, commercial, and waterworks sectors (E20). The "80/20" exit of low-margin products has directly contributed to the margin expansion (E5).
• Conviction Stack:
• Thesis Strength: Moderate (Tactical/Setup-led, no external macro thesis).
• Evidence Quality: High. Multiple primary sources (earnings transcripts, 10-K/10-Q filings) confirm strong operational execution, margin expansion, and balance sheet strength.
• Structural Quality: High. The company is a "growth-oriented, pure-play" with a broad sustainable portfolio (E8).
• Rerating Potential: Supported by the consistent margin expansion and the "pure-play" status in a growing water management sector.

5. Invalidations, Strengths, and Gaps

What Would Strengthen the Case:

• Technical: A confirmed close above the coil resistance level (breakout), validating the "Forming" structure.
• Fundamental: Management raising the full-year FCF guidance above the current $335 million expectation or confirming that Q2 results will drive a Q3/Q4 outlook upgrade (E3).
• Operational: Continued double-digit growth in the filtration and drinking water segments (E4).

What Would Invalidate the Case:

• Fundamental: A significant miss on the Q2 core sales growth (8-9% guidance) or a contraction in EBITDA margins below the 27% target.
• Macro: A sharp deterioration in institutional/commercial construction activity that impacts the backlog (E17, E18).

Gaps in Evidence:

• Valuation Multiples: No current P/E or EV/EBITDA multiples are provided in the evidence block to contextualize the $49.98 price relative to historical or peer valuations.
• Customer Concentration Risk: While the largest customer accounted for 18-20% of sales (E23), the specific impact of a potential loss of this customer is not quantified in the current evidence.

PRIVATE ANALYST CALL Judgment: Buy Confidence: medium Key evidence: 1) Consistent margin expansion (730 bps over 13 quarters) driven by 80/20 portfolio optimization; 2) Strong balance sheet with 0.57 net leverage ratio and extended credit facility; 3) Double-digit growth in high-value filtration/drinking water segments. Sizing hint: Position size should reflect the "forming" state—smaller than a confirmed breakout, but larger than a speculative entry, utilizing the 2.7% ATR for volatility management. Expected path: Management expects to revisit the second half outlook post-Q2; if Q2 results meet the 8-9% sales growth and 27%+ margin guidance, the technical structure should resolve to a confirmed breakout. Expected horizon: 3 to 6 months for the technical setup to resolve into a confirmed trend.