Morgan Keegan Weighs In on Pool Corp. - Expecting The Stock To Drift Lower

As promised on Tuesday, here's Morgan Keegan's take on Pool (NASDAQ:POOL):

Firm notes that while these issues do not represent new information, the degree of the shortfall provides a negative surprise; they note, that their estimate was already $0.11/share below management guidance prior to this week's release. In response to the news, Pool shares sold-off $2.75 in shortened trading hours on Tuesday; investors anticipated the shortfall to some degree, as the stock price had pulled back more than $4 over the two prior weeks. They are lowering 2007 estimate from $1.94 to $1.77 and 2008 from $2.29 to $2.15.

Based on their adjusted EPS numbers, Pool is trading at a 15% premium to the S&P 500. Since January 2003, the shares have traded at a 35% premium to the market. MK believes that Tuesday's sell-off coupled with the pressure onthe stock over the past two weeks provides an attractive entry point. They emphasize their continued belief that demand weakness is tied to the housing market spillover into home improvement spend.

While near-term trends should continue to trend sideways, they believe Pool's performance is admirable in the current environment and EPS trends have been similar to those experienced by leading home improvement retailers such as Lowes. While valuation is currently attractive, the firm believes shorter-term investors may want to wait until there is a tangible improvement in the broader home improvement market; that being said, they believe a restarting of pool industry growth is likely to be swift when it ultimately does occur.

Maintains Outperform.

Notablecalls: My respect for the wonderful team at Morgan Keegan runs deep. Yet, I continue to believe the housing situation will continue to worsen, putting increasing pressure on POOL's performance. I do not see the company growing their EPS much in 2008. The service revenues are more stable but do not warrant a premium to the already high market multiple here.

The stock didn't get hit hard enough to become a good bounce candidate on Tuesday. I expect POOL to drift slowly lower over the next couple of months.