Zurn Elkay Moves the Story to Hot Water — and the Market Won't Pay for It Yet

A New Adjacency Takes the Headline

For three consecutive quarters the Zurn Elkay adjacency story was drinking water — Pro Filtration, attachment rates, Filter First legislation. This quarter it changed loops. Hot water sits atop the company's own keyword list for the first time, and President Jeffrey Schoon devoted slide six to the Wilkins Runpoint, a digital master mixing valve aimed at a complementary market of more than $200 million, where the digital slice is growing double digits and the long-run ambition is a $50 million category for Zurn.

The IntelliHot and Runpoint together, we are establishing our position at the core of the domestic hot water system, both generating the hot water and controlling how it is delivered throughout the building.

Paired with Intellihot — the tankless condensing water heater business Zurn bought with $107 million of cash earlier this year, contributing 2 points, or $6 million, of Q3 sales growth — the company now sits at both ends of the domestic hot water loop. That is a real served-market expansion rather than another share-gain story inside plumbing, and it lands in a Water Solutions conversation that peers from Kemira to Pentair were also having this reporting season. Adams framed it as a template, not a one-off: 2027 should bring more categories "in the $100 million to $200 million range," developed in-house when M&A cultivation stalls — which is exactly how Runpoint came to exist.

What dropped out is just as telling. Attachment rate was Zurn's number-one keyword in the first quarter of 2026; it does not appear in this quarter's top thirty. Filtration is still growing — water safety and control and drinking water led the quarter again — but the narrative energy has moved to a category where Zurn is the challenger, not the specification incumbent.

The Incremental Margin Ratchet, One More Notch

Zurn has now lifted its structural incremental-margin target four times in about twelve months, and the trail is unusually well documented. Last October the CFO framed a long-term view of “30% to 35% incrementals on volume” — David Pauli, Chief Financial Officer · 2025-10-29. By February, 35% was the baseline — “and all things equal, if we execute like I think we will over the next 2 to 3 years, I think that, yes, the number can move higher for sure” — David Pauli, Chief Financial Officer · 2026-02-04. In April, Adams allowed that “we may modify that... we'll revisit it when we feel like we're ready to” — Todd Adams, Chairman and Chief Executive Officer · 2026-04-22. Now:

Notably, Adams insisted the 40% comes from “our core business as it sits today” — Todd A. Adams, Chairman and Chief Executive Officer · 2026-10-28 — hot water is upside, not scaffolding. Year to date the model has backed the claim: sales of $1.419 billion, up 10% reported and 9% core, adjusted EBITDA of $392 million at a 27.6% margin, a 41% incremental. The last reported quarter's operating margin of 31.0% and interest coverage of 25x are what make the ratchet credible rather than promotional.

And note what quietly stopped being a headline: tariffs. A year ago Zurn's keyword list was wall-to-wall tariff environment, HTS codes and price/cost. This quarter the only trace is $1.5 million of IEEPA and reciprocal refunds sitting in cost of goods sold and excluded from non-GAAP, plus a "regular way" couple of points of price in 2027. The net impact of tariff refunds is now a rounding item — the payoff on sourcing work Adams described last October: “over 50% of our COGS comes from the U.S. today, and by the end of next year, only about 2% to 3% will come from China” — Todd Adams, Chairman and Chief Executive Officer · 2025-10-29.

2027: A Down Market and a Growth Plan

Sitting here today, and not surprisingly, broader economy and parts of our end markets do not feel like they are going to be a tailwind for our business in 2027. So we are going to simply do what we know how to do and what is worked.

That is the tension at the heart of the call: a company telling investors the market shrinks, and that it grows anyway. The starts data supports a nuanced read. Institutional is 50% of exposure, and education plus healthcare is 72% of that — a basket that contracted at a 4% CAGR over four years and is projected to grow 3%. Commercial is 30%, with office, retail and hotel at 77% of it; strip out data centers, and that basket fell 1% a year and is forecast to grow 3%. Data centers are classified inside office by Dodge and account for the entire rise in office's share of starts.

So the potential inflection is not in the hot story — it is in the boring one:

The track record behind the confidence is real: positive core growth in 59 of the last 63 quarters and a 6% ten-year core sales CAGR. The new growth algorithm — flat-to-down market, low single-digit price, a point of share, a point of secular mix, less a point of SKU pruning — is now the company's explicit public arithmetic.

Why the Tape Isn't Paying for It

ZWS trades 18.2% below its August 4 peak of $53.18 and is down 9.9% over ninety sessions — for a company that just closed another record year, raised EBITDA guidance to $512–515 million, held free cash flow above $350 million, lifted the dividend 18% and repurchased $35 million of stock at 0.4x leverage. The disconnect is the story.

Part of it is the complex Zurn sits next to. Over the last 90 days the AI data center basket in the global tape is down 5.4% with fifty decliners against six advancers, and data center capacity names are off roughly 8%. Zurn is not a compute stock — Adams has been pointedly lukewarm about data centers ever being a real wedge in the pie — but its commercial nonresidential exposure has quietly become a partial data center derivative, because that is what is holding up office starts. If the market is de-rating the buildout, Zurn's 2027 starts get marked down in sympathy.

Part of it is price. At 22.4x operating income the stock is no longer expensive by its own history; at 4.7x revenue it is still priced as a compounder. A management team conceding a down market next year, guiding a 40% incremental algorithm and trading at a near-record sales multiple leaves little room for a Dodge forecast that misses.

The bull case is simple: a $7.2 billion industrial that has grown core sales every year for sixteen years, just bought into a $200 million valve market and a hot water loop it can attack through the Wilkins specification channel, and is compounding margins faster than anyone modeled. The bear case is equally simple — the market it sells into is forecast to shrink, and the tape has started voting. Which is why the number that matters in February will not be the 2027 guide. It will be whether Dodge's education and healthcare inflection actually shows up.