Insights

Why Zurn Elkay Water Solutions Stock Tanked in Early Trading Today

What happened

Shares of Zurn Elkay Water Solutions (NYSE: ZWS), a maker of water-related products such as fountains, faucets, and pipes, fell just shy of 16% at the open on Wednesday. The big news was the company’s second-quarter earnings release, which hit the market after the close on Tuesday. It wasn’t exactly filled with bad news, but investors clearly didn’t like the quarterly update.

So what

Second-quarter sales increased 17% year over year; 15 percentage points of that total came from core operations, with the remaining 2 percentage points driven by acquisition activity. Adjusted earnings of $0.32 per share were well above the year-ago tally of $0.22.

Analysts had been calling for adjusted earnings per share of around $0.29, so the company beat on the bottom line. It also announced that the board, as planned and previously announced, was increasing the quarterly dividend from $0.03 per share to $0.07. You might have expected all of this to result in a positive mood among investors.

The complicating factor for Zurn Elkay is that over the past year, the company has been going through a total overhaul that isn’t yet complete. For example, in October 2021, it spun off a large portion of its business so Zurn could focus on its water operations. Subsequent to that, it announced plans to acquire Elkay, creating Zurn Elkay. That deal closed at the start of this month, so this transaction is not represented in the second-quarter results. 

Some items of note arise from this. Part of the logic for the transaction was around $50 million in synergies, with $25 million coming in year one. When the company announced second-quarter earnings, it said that the $25 million in savings would come in 2023, with another $25 million in 2024, seemingly pushing the synergy benefits out at least six months.

On top of that change, the deal required increasing the share count by roughly 40% based on the average share count at the end of the second quarter. That’s a fair amount of dilution. The actual impact of these items won’t be known until third-quarter results are in.

Now what

At this point, there’s no reason to think the Zurn Elkay combination won’t be successful. But the second-quarter results aren’t really indicative of what the company will report in future quarters now that the Elkay deal has been consummated. And with the dilution and change in timing for synergies, there are some additional uncertainties that investors need to digest here.

Despite what seemed like a good quarter for Zurn Elkay, investors might have been looking for more certainty amid the various, and material, moving parts at this industrial name.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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