Trading Options with an Edge
Select Page

Hawk’s Nest

Call Buyers Target Recent Spin-Off Benefitting from Infrastructure, Sustainability Megatrends

by | Dec 6, 2021

Zurn Water (ZWS) recent spin-off from Rexnord worth diving into with shares holding up well over the last couple weeks and buyers yesterday in the January $37.50 calls 1000X. The $4.3B company is Rexnord’s water management business which provides full systems, plumbing and drainage products for non-residential buildings. Part of their business includes smart products like sensor faucets, soap dispensers, flush valves, and showers. ZWS also has fire protection services like relief and fire valves, in-building switches, and other water-related products. ZWS has seen strong demand for their ‘no touch’ products during the pandemic and benefitting from a big refresh cycle within offices and other large-community spaces that are looking to modernize handwash stations and other taps. Their next-gen plumbing products are also winning more share in remodel and rebuilds and generating a big customer base for their plumbSMART portal. The company also sees themselves in the early innings of the sustainability megatrend which the infrastructure bill will also drive forward too:

“If we look at the next 3 to 5 years, we see incredible runway for growth, both organically and from an M&A perspective. The idea of being a stand-alone pure-play water business levered to a number of water and sustainability megatrends is something we’ve been laser-focused on for a while. And we feel like we’re very early in the journey of capitalizing opportunities here. And that’s before we dial in what an infrastructure bill might do for our business. Sitting here today, I would say we’ve never had the number of organic opportunities in front of us that we see today. The one we’ve discussed for the last year has been the touchless hygienic opportunity that we branded BrightShield. This continues to have an enormous medium- to long-term upside, not just for new construction, but the massive available retrofit market that we’ve only entered in the last year. But it’s not just that. It’s the fact that we’ve effectively reinvented our drain business the past several years with patented solutions that perform better, reduce cost for installers and give us opportunities to rewrite specifications around these solutions.”

Shares trade 32X earnings, 2X sales, and 9X cash with a 1% yield. Analysts have an average target for shares of $41 with a Street High $43. OpCo bullish on the name post-spin in October arguing that standalone Zurn will continue to reward shareholders through earnings/cash flow outperformance and well-deserved valuation support. Overall, they expect shares to trade at a premium reflective of its strong financial profile and clear ESG underpinning. Hedge fund ownership rose 4%. Bayberry Capital a buyer of stock.