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Ron Baron on Pool Corporation

August 16, 2006 | About:

Swimming pools – once considered a luxury few could afford – have become a mainstay in the backyards of America’s Baby Boomers. Several demographic trends have been behind this change. First, a decade of low interest rates and rising home ownership has led to increased discretionary spending on home improvement projects and recreational pursuits. In addition, the Sunbelt has seen dramatic population growth as empty nesters, retirees, and families migrate south to the warmer climates of Florida, Texas, and California. Technology has also transformed many new pools, which now include elaborate features, such as automatic timers, temperature controls, spill-over spas, waterfalls, and various lighting effects. Yet despite these advances, we believe that the pool industry remains largely underpenetrated and early in its growth. The total installed base stands at 8 million pools domestically, relative to the company’s estimated addressable market of 70 million households with both the economic capacity and backyard space to enjoy a pool’s benefits. We believe that Pool Corporation is uniquely positioned to benefit from these favorable industry forces.

Pool is the largest wholesale distributor of swimming pool and related backyard supplies with a network of 200 branches throughout the U.S. Originally operating as a regional distributor, the company came public in 1995 and made several acquisitions on its way to becoming the dominant player with 30% share of the pool supply market. Today, Pool’s revenues are ten times larger than its closest competitor’s and are also larger than any of Pool’s suppliers’ revenues. The company sells its products primarily to the maintenance professional, rather than the ‘‘do-it-yourself’’ homeowner. These customers are fragmented and tend to maintain very little inventory, relying on a local Pool branch to replenish their supplies regularly, including chemicals, filters, and cleaning tools. These customers are typically local outfits that regularly service homeowners’ or communities’ swimming pools. As a result, the business model offers in our view, very attractive characteristics, including: 1) high levels of recurring revenue from maintenance customers, retail stores, and pool builders; and 2) modest capital requirements to open new branches. Pool also, in our view, offers its customers a high degree of service and enjoys a loyal customer base as a result. The company’s local branches serve as a vital resource in helping these ‘‘mom & pop’’ customers grow their business by building websites for them, printing marketing materials, and generating leads for new pools.

Pool’s forward-looking management team recently acquired a second concept that we believe will drive growth over the next decade. Horizon is a West Coast-based distributor of landscaping and irrigation supplies to professional contractors, a business that bears similar traits to pool distribution, though at an earlier stage of development. With fewer than 50 branches and a significant crossover in suppliers and customers of both product categories, we think Horizon complements Pool and enables the combined company to own both the backyard and front of the house. When a new pool is constructed, for example, a homeowner’s backyard is frequently torn up and requires significant irrigation and landscaping work as a result. In addition, the local landscaper that services a homeowner’s lawn is also a regular maintenance customer, essentially providing an annuity of sorts for the distributor. Separately, we believe that Pool Corp. and Horizon possess attractive fundamentals and unique opportunities to grow their market and their share. Together, we believe that they make an even bigger ‘‘splash,’’ and we forecast sunny days ahead for Pool.

Rating: 3.1/5 (9 votes)

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