Zurn Elkay Water Downgraded: Analyst Cautions Of Incremental Cracks Nearterm Amid Demand Slowdown

KeyBanc analyst Jeffrey D. Hammond downgraded Zurn Elkay Water Solutions Corporation ZWS to Sector Weight from Overweight.

According to the analyst, a weaker non-res'l backdrop outweighs drinking water tailwinds.

The analyst cautions of incremental cracks that have continued to emerge in the near term. 

That said, the analyst highlights that Institutional end markets (~47% of sales) continue to hold up better vs. Comm'l (~30% of sales) and sees modest Institutional growth.

Per the analyst, shares at these levels are priced for the higher end of possible outcomes (modest Institutional growth and Comm'l only slightly down).

As such, while the analyst sees secular Drinking Water momentum to provide an offset and ZWS pointed to only "modest" growth in 2024, the analyst said upward earnings momentum will prove to be difficult amid a less supportive demand backdrop.

While the analyst said outgrowth is less dependent on Hygienics and continue to see ZWS outgrowing its end markets LT, Hygienics will likely now act more cyclical vs. secular, which is notable amid potential end-market moderation.

Looking out, amid the aforementioned weaker demand backdrop, further re-rating and upward revisions could prove difficult to capture, supporting the analyst's view that the risk/reward on ZWS has become more balanced. 

Price Action: ZWS shares are trading lower by 2.24% to $28.58 on the last check Wednesday.

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