Summer swimming season is over—but taking care of a pool lasts forever. That makes it a good time to jump into Pool Corp. stock.
Shares of the Covington, La.–based Pool (ticker: POOL) soared in 2021 as homeowners, bored from Covid-19 lockdowns and flush with cash thanks to rising home prices and government stimulus payments, rushed to put swimming pools into their homes. About 117,000 pools were installed in the U.S. in 2021, up 50% from prepandemic 2019. But Pool stock has fallen 39% in 2022, more than the 32% drop in the iShares U.S. Home Construction exchange-traded fund (ITB), let alone the S&P 500 ’s 16.5% decline , as it gets punished for the reversal of those tailwinds.
Yet Pool’s stock move seems extreme. While the company certainly benefited from Covid lockdowns and rising home prices, it’s far from a play on just those things. Pool is the world’s largest wholesale distributor of swimming-pool supplies—as big as its top 50 competitors combined—with a dominant market share and some 80% of its business coming from recurring services such as repair, maintenance, and remodeling of already installed pools. And that revenue isn’t likely to go away.
“I equate it to your utility bill or cellphone bill, certain things you’re going to buy month after month,” says Sandy Villere, partner and portfolio manager at Villere & Co., who has been adding to his position, which he has held since 1996. “People don’t let their pool turn green, and hardly anyone fills theirs in.”
Pool’s recent financial results, however, might have made investors turn that sickly color. The company’s stock dropped 10% on July 21 after it reported second-quarter profits of $7.59 a share, ahead of expectations, while revenue of $2.1 billion came in about 4% below consensus. The stock has largely languished since, and now hovers just around 5% above its 52-week lows as analysts now project growth of just 2% a year on average for the next two years. If annual earnings slip to $18.57 a share, as expected in 2023, it would be the first year-over-year decline in more than a decade. But it isn’t surprising that profits would cool slightly from the pandemic’s white-hot levels.
While bears argue that the recent second-quarter top-line miss is evidence that Pool is susceptible to the softening housing market, they might simply be wrong. The company blamed a particularly wet and cold spring, with recent heat waves boosting sales. And that reveals a strange fact about the swimming-pool business: It’s better during periods of drought than monsoon. A pool uses, roughly, half the water of a lawn. California droughts of years gone by haven’t affected Pool’s distribution business to a significant degree, and the company has used prior dry periods to educate water officials and pool buyers about the efficiency of pools versus other landscaping options.
The recent decline also means that investors can buy Pool stock at a relative bargain. The stock is trading at about 18 times estimated 2023 earnings, about a 13% premium to the S&P 500 multiple of 16 times. Pool stock typically gets a 50% premium to the market because earnings have grown faster over time. The last time Pool stock was this cheap relative to the market was at the start of 2008, in the midst of the housing crisis, and before that in 2003. Investors buying at those times outperformed the S&P 500 by roughly eight percentage points a year for the decade following the 2003 bottom and about 14 points a year for the decade following the 2008 bottom.
Even during the 2007-09 recession, the company’s recurring maintenance and repair business didn’t budge much, noted Pool CEO Peter Arvan during the company’s second-quarter conference call. “So, even if there is some apocalypse scenario from an economic environment, we would expect that part of the business to continue to perform,” he said.
Growth should return, as it did back in 2010 after the housing crisis. Wall Street currently projects earnings to grow about 6% to $19.62 in 2024, compared with the $18.57 expected next year. And it’s not like the business isn’t performing now. CFRA Research analyst Zachary Warring, who recently called Pool his “top idea in retail,” notes that margins improved across the board in the second quarter, with gross margins up 1.5 percentage points to 32.4% thanks to higher pricing and supply-chain improvements.
He believes that trend will continue, and expects Pool “to take a breather from acquisitions to build its cash position and deleverage in the short term, which we see benefiting margins over the next 12 months,” he writes. Warring thinks the shares should trade at $512, up 48% from Wednesday’s close of $345.54.
Let’s just say that would make quite a splash.
Write to Teresa Rivas at teresa.rivas@barrons.com and Al Root at allen.root@dowjones.com
