This pool-based business beat analysts’ estimates by $0.12 last quarter.
Pool Corp. (POOL)
From Pivotal Point Trader
I’m very excited about adding Pool Corp. (POOL) to our portfolio. The Covington, LA, company is the world’s largest distributor of wholesale pool supplies, equipment and outdoor lifestyle products. It also operates in irrigation and landscape, pool maintenance, refurbishment and construction.
Its business is improving and the stock price recently moved to the upper end of the trading range. This is a point of inflection. My work indicates it is time to buy.
Swimming pools hardly seem like a growth business. Construction is tied to housing prices and many counties have enacted water restrictions. The growth is in the intangibles. It’s really more about weather and recurring revenues from the existing installed base.
Recently, warmer weather trends have led more people to open their pools sooner. When they open earlier, they use more supplies. And Pool Corp. management has done a phenomenal job building sustainable competitive advantages around distribution.
Pool operates 344 sales distribution centers, primarily in the Sun Belt. It uses its scale, capital strength and supply chain advantages to keep others from entering the market. The result is high recurring revenue and very little cyclicality.
Further, management is extremely disciplined. It routinely returns excess cash to shareholders in the form of dividends or share repurchases. And 80% of senior management compensation is based on performance.
Incentivizing managers is paying off. Since 2011, sales have increased at a 7% compound annual growth rate (CAGR), to $2.571 billion. Adjusted EBITDA increased at a 15% CAGR. That kind of predictable growth has been Nirvana for shareholders.
Since the IPO in 1995, the stock has grown at a mind-boggling 26% CAGR, yet it is still fairly small for such a dominant firm, at a $4.9 billion market cap. Another way to put it: Shares have risen 15,975% since the initial offering in 1995, which would turn a $10,000 investment into $1.59 million.
Most of this was accomplished without a boost from new pool construction. New builds are still only a third what they were prior to the housing crisis. However, change is coming. According to estimates from P.K. Data, a research analytics firm cited in a recent Pool Corp. presentation, new construction is set to start rising again in 2018, pushing to 130,000 units in 2023.
A larger install base, coupled with warmer temperatures and management acumen should lead to even better stock performance.
Pool shares have been mired in a consolidation pattern between $113 and $122 since March. A rally through the upper end of the trading range would suggest the start of an important new leg higher. And I have enough confidence in this stock to recommend buying again at lower levels.
Jon Markman, Pivotal Point Trader, www.moneyandmarkets.com, issues@e.moneyandmarkets.com, 800-291-8545, June 7, 2017