Pool Corporation: Don't Jump In

| About: Pool Corporation (POOL)

Summary

Pool Corporation is the world’s largest wholesale distributor of swimming pool and related backyard products.

The strong stock performance reflects increasing sales and profits due to gains in market share, an improving economy, and warmer-than-average temperatures at the end of last year.

POOL generally has better fundamentals than other distributors. One concern is the high debt/equity ratio in an environment of rising interest rates.

Investors should consider buying POOL on a pullback in price to around $108 with a protective stop at about $103.

Risks include inability to deliver on forward guidance, bad weather, loss of market share to competition, and rapid rise in interest rates.

Pool Corporation (NASDAQ:POOL) is the world's largest wholesale distributor of swimming pool and related backyard products, with sales centers in North America, Europe, South America, and Australia. Over the past year, POOL has outdistanced its peers in the GICS Distributors industry by a substantial amount, up 43% compared to 3% for the retail distribution industry.

(Source: Portfolio123*)

* Portfolio123 is an affiliate link which gives new signups a 30-day free trial instead of 15 days.

The strong stock performance reflects increasing sales and profits due to gains in market share, an improving economy, and warmer-than-average temperatures at the end of the year, which lengthened the 2016 season.

Company Fundamentals

As I mentioned earlier, both revenues and profits have been steadily increasing for several quarters as a result of market share gains and improving economy.

The company's forward earnings guidance for 2017 is within the range of $4.00-$4.20, which includes $0.20 due to the adoption of new accounting guidance related to the income tax treatment of compensation from share-based awards.

(Source: Portfolio123)

The table below highlights how POOL compares to the GICS Distributors industry. Note that the industry includes companies in other than pool and outdoor leisure products, including Genuine Parts Company (NYSE:GPC), LKQ Corporation (NASDAQ:LKQ), and Core-Mark Holding Company, Inc. (NASDAQ:CORE).

(Source: Portfolio123)

In general, POOL has superior fundamentals compared to the distributors industry. Its P/E ratio is higher, but this is an artifact of how the aggregate P/E ratio is calculated. Companies with negative earnings are not included in the aggregate, making the industry P/E ratio artificially low. There are 17 companies in the distributors industry and 6 of them have negative earnings including: Alliance Media Holdings Inc. (OTCPK:ADTR), TRHF Company Limited, Inc. (OTCPK:TRHF), 2050 Motors, Inc. (OTCQB:ETFM), Global Future City Holding Inc. (OTCPK:FTCY), Agritek Holdings, Inc. (OTCQB:AGTK), and Fenix Parts (NASDAQ:FENX).

One area that concerns me is the high debt/equity ratio. This could be an issue longer term with rising interest rates.

Analyst Estimates

Sales and EPS have generally beaten analysts' estimates, with some large positive EPS surprises during off-season quarters. POOL is a seasonal stock and the next quarter is off season, meaning the results could be a bit more volatile. In general, the company appears to be providing conservative forward guidance. The message here is that investors should not fear large negative surprises come reporting time.

(Source: Portfolio123)

The average recommendation for POOL is 2.0 on a scale of 1 to 5 with 1 being a 'Buy' and 5 being a 'Sell,' which is an average rating for the distributors industry. For example, GPC has an average recommendation of 3.0, while LKQ has an average recommendation of 1.5.

(Source: Portfolio123)

The stock short interest is at 2.8% of float, down from ~6% a few months ago. 2.8% short interest is average for the distributors industry. For example, GPC has short interest of 1.5%, while LKQ has short interest of 2.1%.

Technicals

On the daily chart, the stock price has been rising almost continuously, with a few flat periods or periods of consolidation.

(Source: stockcharts.com)

On the weekly chart, the stock price has been steadily rising within an ascending channel since 2014. Based on the price history, I would expect a pullback to the lower trend line, probably sometime this year. For long players of POOL, a protective stop should be placed below the support level at ~$103, then adjust the stop upward over time to slightly below the lower trend line as the stock price goes higher.

Investing in POOL

Overall, I am slightly bullish on POOL based on the following:

Positives

  • Strong returns - ROE (65%), ROI (24%)
  • Historically, forward guidance has been conservative
  • Strong forward earnings guidance of $4.00-$4.20 per share
  • Largest wholesale swimming pool distributor with growing market share
  • Strong price momentum

Negatives

  • High debt/equity ratio relative to the industry going into a rising interest rate environment
  • Less cash on hand than other distribution companies.
  • For a relatively mature company, the P/E ratio at 34.95 seems to be on the high side

While I like POOL as an investment, I think it would be prudent to wait for a pullback closer to the support level of $108 before buying.

Trade Risks

The main risk is that the company doesn't deliver on its strong forward earnings guidance. Other risks include colder summer weather, loss of market share to competitors, and rapid interest rate increases.

Wrap-Up

Pool Corporation is the world's largest wholesale distributor of swimming pool and related backyard products. The strong stock performance reflects increasing sales and profits due to gains in market share, an improving economy, and warmer-than-average temperatures at the end of last year. POOL generally has better fundamentals than other distributors. One concern is the high debt/equity ratio in an environment of rising interest rates. Investors should consider buying POOL on a pullback in price to around $108 with a protective stop at about $103. Risks include inability to deliver on forward guidance, bad weather, loss of market share to competition, and rapid rise in interest rates.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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