Although Pool Corporation (NASDAQ:POOL) was a major COVID beneficiary through the stay-at-home protocols, I believe the future growth runway is still reasonable for a few significant reasons:
In my opinion, with clear growth drivers supporting earnings, Pool will continue to grow profitability metrics over time. I believe profitability growth will continue supporting historically above-average valuations as well as allow for cash flow generation to fuel future acquisitions.
Pool operates over 395 sales centers across North America, Europe, and Australia and is currently the world's largest wholesale distributor of swimming pools and outdoor living products. Pool distributes over 200,000 products from over 2,200 vendors to ~120,000 wholesale customers. Below are Pool's selection of products:
Pool has generated shareholder returns excess of 26% annualized since IPO'ing back in 1995. I believe Pool has a long history of consistent top-line expansion driven through organic as well as acquisition-related growth. In my opinion, Pool is a classic example of a niche business with a disciplined management team that has successfully operated with high levels of efficiency over time.
Prior to COVID, only 6% of Americans worked primarily from their home. In May of 2020, 35% of the employed workforce (48.7 million people) was working from home. While there was potential for the work-from-home [WFH] to revert back to the office following COVID, it is now clear the WFH trend is sticky and may potentially stay elevated moving forward.
While WFH numbers have clearly decreased over the measured timeframe, still ~1/4 of employed Americans were working from home at the end of 2020. Looking forward, many employees now favor companies with WFH ordinances and almost 1/3 of workers would prefer WFH full-time. Even with the expected WFH population to drop to 19%, that is still 3x the level prior to the pandemic.
With WFH potentially here to stay, I believe discretionary consumer spending on homes will continue. I also think it is important to note the more highly populated WFH jobs are higher paying than those on the lower end of the scale. I believe this will also drive discretionary spending and increase new construction revenue for Pool.
I believe the new construction discretionary activity is still widely evident as Pool reported strong builder/remodeler backlogs in their latest investor presentation. While new construction and discretionary spending are great for short-term elevated revenue growth, I believe the non-discretionary maintenance revenue will continue driving long-term organic growth for Pool.
I believe Pool's recent acceleration in top-line (driven through discretionary new construction) will allow for organic growth to continue at a faster rate over time.
I believe heightened new construction will allow for non-discretionary outlets like maintenance and retail supplies to accelerate in the future as people with new pools will be forced to spend in that category. Through non-discretionary, organic growth, Pool's profitability metrics and operating leverage may increase as well potentially generating even higher free cash flow, in my opinion.
Note: big-ticket items like full pool construction are typically lower margin but drive higher-margin items like retail supplies and maintenance.
This thesis point will be reflected in my model highlights shown in the financial section below.
Because increased top-line has already fueled higher free cash flow, Pool has been able to grow earnings through acquisitions. I believe this trend will stay strong moving forward supported by the potential for operating leverage to grow allowing for Pool to continue its dominance in the industry.
Prior to 2020, Pool typically traded in a next twelve month [NTM] P/E channel between 10x and 30x, in my opinion. Recently, Pool broke out to highs of 45x NTM P/E and has now retraced to current levels at 31.4x.
Below is a chart comparing Pool's last twelve month [LTM] P/E to ROIC:
Historically, Pool's P/E ratio and ROIC have grown in tandem over time. If my forecasted increases in operating leverage can continue driving ROIC higher (and consistently over 40%), I have reason to believe Pool's P/E ratio can stay elevated.
Even if Pool reverts to my more 'conservative' target of 25x NTM earnings, I still believe future sales growth and margin expansion will deliver positive returns for shareholders.
(EPS-based PTs are calculated by multiplying EPS of $22.96 by the P/E multiples of 37.5x, 30x, and 25x. % Return and CAGR columns use a present value share price of $510. CAGR is using an n=4.25 years.)
I believe the biggest risk for Pool is failed acquisitions. In my opinion, Pool will have to rely on acquisitions to fuel long-term growth and current market dominance. While I believe they will have the cash flow to support future acquisitions, if opportunities dry up or management fails to execute, profitability could decline leading to multiple contractions and declining stock price.
Pool has a long history of returning exceptional amounts of wealth to shareholders. Through annualized stock returns of 26% since IPO and a consistently growing dividend (15% annualized growth since 2012), shareholders have reaped returns through this company. I believe Pool has an excellent runway ahead for continuous, sustained growth driven by potential increases in non-discretionary spending and increased profitability driving acquisition growth. While valuation is in the upper percentile when compared to history, I believe growth prospects potentially boosting profitability will support elevated valuations over the next 5 years.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in POOL over 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.
Additional disclosure: This analysis is not a guarantee of future results, models and projections are based on inputs that are likely to exclude all factors that may reflect a complete analysis. Furthermore, calculation errors, inaccurate reporting, and unseen inputs could bias results. For financial advice please consult with your advisor or other professional.
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