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Why a Pool Titan May Go a Long Way in Your Portfolio

March 26, 2014 | About:
Patricio Kehoe

Patricio Kehoe

7 followers

The unstable weather conditions experienced this past year affected several industries, but the pool and landscape businesses on at the top of the list. As the world’s largest wholesale distributor of swimming pool supplies, equipment and landscaping products, Pool Corp. (POOL), took a hit to its portfolio in third quarter of fiscal 2013, but has slowly recovered since then. The year closed with an EPS of $2.05, due to an impressive growth rate of 21.3%, which was enough to convince Jim Simons (Trades, Portfolio)’ hedge fund to buy the company’s shares last quarter.

A Diversified Business Model

Pool’s success and solid growth rates are largely due to its diversified product portfolio, which offers 160,000 products related to swimming pool construction and maintenance, as well as landscaping. While the swimming pool segment is the firm’s core business, generating over half of gross profits from maintenance and repair products, the Green Business (landscaping) accounts for 8% of sales. As the company’s main customers are small, family-owned businesses, sales strongly rely on discretionary spending in the California, Florida, and Arizona markets. Nonetheless, Pool’s position as the only national wholesale distributor of swimming pool products in the U.S., and third largest regional irrigation products distributor, grants the company a significant scale advantage.

In addition to this, the firm operates through three separate networks, making distribution more efficient. I believe Pool has strong potential for acquiring more market share in the future, as the amount of vendors is limited in the country. Furthermore, as the housing construction market picks up its pace so will the company’s growth, since pool construction tends to increase proportional to home construction and ownership. Thus, with discretionary spending’s recovery since 2010 and the reboot of the home construction industry, revenue has grown at an annual 10.8% rate for 2013, which management expects to maintain for the next five years.

Valuation

I must point out this firm’s commitment to its shareholders, who have benefitted from a consistent dividend distribution program, raising dividend eight times over the past decade. Moreover, this past November Pool issued its newest stock repurchase program, resulting in share repurchases for the value of $26.4 million in 2014 alone. And investors should expect another $70.4 million in shares for the rest of the fiscal year. The program will additionally help the company reduce its share count, resulting in 20% EPS growth year-over-year (approximately $2.40 expected for 2014) and higher returns on equity (currently at 34%). Gross profit, which jumped from $567 million to $591 million in the last year alone, should also continue at this rate in years to come.

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Although the firm’s costs will increase by around 5% in 2014, due to the opening of 8 new store locations, I remain bullish about Pool’s profitability in the long term. With a strong 19.2% EBITDA growth and 8% operating margins, investors can expect to benefit from placing their money in this company. And although the stock is currently trading at a 37% price premium relative to the industry’s average of 21.6x, I think that Pool’s position as the leading swimming pool product distributor makes it a safe investment for the long term future.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 3.7/5 (3 votes)

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