Zurn Elkay Water Solutions' Q2 2025 Outperformance: A Blueprint for Long-Term Investment in a Defensive Growth Sector

Zurn Elkay Water Solutions (NYSE: ZWS) has delivered a masterclass in strategic execution and operational resilience, posting a standout Q2 2025 performance that underscores its position as a leader in the high-growth, defensive water solutions sector. With net sales climbing 8% year-over-year to $445 million and adjusted EBITDA surging 13% to $118 million, the company has not only navigated global trade headwinds but also leveraged them to drive margin expansion and shareholder value. This outperformance, paired with a robust long-term strategy, makes Zurn Elkay a compelling investment opportunity for those seeking exposure to a sector poised for sustained growth and societal relevance.

Operational Excellence and Margin Expansion: A Formula for Resilience

Zurn Elkay's Q2 results reflect a disciplined approach to cost management and pricing power. Adjusted EBITDA margins expanded to 26.5% from 25.3% in the prior year, driven by the Zurn Elkay Business System (ZEBS), a lean manufacturing framework that has streamlined supply chain operations. The company also offset global tariff pressures through selective price increases, a strategy that has kept it price-cost positive despite a projected $35–45 million tariff impact for 2025.

The balance sheet further reinforces confidence. With a net debt leverage ratio of 0.7x as of July 2025—a significant improvement from 1.4x in December 2022—Zurn Elkay has demonstrated its ability to deleverage while funding strategic initiatives. Free cash flow for the quarter exceeded $100 million, enabling $33 million in share repurchases and signaling a commitment to returning capital to shareholders.

Strategic Innovation: Leading the Charge in Sustainable Water Solutions

Zurn Elkay's outperformance is not merely a function of operational efficiency but also a result of forward-thinking innovation. The launch of its Elkay Pro Filtration product line in 2025 exemplifies this, combining advanced PFAS reduction capabilities with connected technology for real-time monitoring. These units, certified to NSF/ANSI standards, address a critical market need as regulatory scrutiny over “forever chemicals” intensifies.

The company's commitment to sustainability is equally noteworthy. With 86% of revenue derived from products with sustainable attributes, Zurn Elkay is aligning itself with global environmental goals. Year-to-date in 2025, its systems have saved 16.6 billion gallons of water and delivered 1.2 billion gallons of cleaner, filtered water—metrics that resonate with ESG-focused investors and municipalities seeking to meet decarbonization targets.

Defensive Sector Dynamics: Why Water is a 'Must-Own' for Long-Term Portfolios

The water solutions sector is inherently defensive, characterized by inelastic demand and regulatory tailwinds. As global populations grow and climate change exacerbates water scarcity, the need for advanced treatment technologies will only accelerate. The market for water treatment systems is projected to grow at a 8.1% CAGR through 2030, reaching $66.98 billion, while water and wastewater equipment is expected to expand at 4.9%.

Zurn Elkay is uniquely positioned to capitalize on these trends. Its diverse product portfolio—spanning residential, commercial, and industrial applications—ensures broad demand across economic cycles. Moreover, regulatory frameworks such as the U.S. Safe Drinking Water Act and the EU Taxonomy for sustainable finance are creating a “must-upgrade” environment for infrastructure, further insulating the company from macroeconomic volatility.

Navigating Risks: A Prudent Approach to Tariff Challenges

While global trade tensions pose risks, Zurn Elkay has proactively mitigated exposure. By reducing China-based material spend to 2–3% of COGS by 2026, the company is projected to avoid $45–$55 million in potential tariff costs in 2025. This strategic shift, coupled with a $90 million annual R&D investment in clean technologies, ensures the company remains agile in the face of geopolitical uncertainties.

Investment Thesis: A High-Conviction Play on a Resilient Sector

Zurn Elkay's Q2 2025 results validate its ability to execute on both operational and strategic fronts. With full-year guidance of $420–430 million in adjusted EBITDA and $300 million in free cash flow, the company is on track to deliver consistent returns. For investors, the key takeaway is clear: Zurn Elkay is not just surviving in a challenging trade environment—it is thriving by innovating, deleveraging, and aligning with secular growth drivers.

Why Invest?
- Defensive Growth: The water sector's inelastic demand and regulatory tailwinds provide a stable foundation for long-term gains.
- Margin Resilience: ZEBS and pricing discipline ensure margins remain robust despite cost pressures.
- ESG Alignment: Sustainability-driven product lines and water conservation metrics attract a growing cohort of ESG-focused investors.
- Capital Efficiency: Aggressive deleveraging and shareholder returns enhance intrinsic value.

Conclusion: A Compelling Long-Term Bet

Zurn Elkay Water Solutions has demonstrated that strategic resilience and innovation can drive outperformance even in a volatile global environment. As the water solutions sector gains momentum, the company's ability to balance growth with sustainability positions it as a standout investment. For those seeking a defensive, high-growth play with strong ESG credentials, Zurn Elkay offers an attractive and well-justified opportunity.

Investors should monitor the company's progress on its 2026 China-spend reduction target and its ability to scale Elkay Pro Filtration adoption. With a forward-looking strategy and a sector primed for expansion, Zurn Elkay is not just a beneficiary of the water boom—it is a catalyst for it.