Is Pool Corporation Stock (NASDAQ:POOL) Worth Diving Into?
Stock Analysis & Ideas

Is Pool Corporation Stock (NASDAQ:POOL) Worth Diving Into?

Story Highlights

Pool Corp’s adept supply-chain management, efficiency-driven inventory control, and customer-centric focus have led to impressive share price gains over the past decade. With shares now trading at a reasonable valuation following the stock’s recent dip, this trend is likely to resume.

Pool Corporation’s (NASDAQ:POOL) investment case appears to be worth diving into at the stock’s current levels. The premier supplier of pool supplies, equipment, and related products is now trading 40% below its 2021 peak, when the stock briefly crossed $580/share. However, the company has kept posting stellar results since. With the stock currently trading at a more reasonable valuation, I anticipate a swift resumption of POOL stock’s journey to create shareholder value. I am bullish on the stock.

POOL Stock’s Exceptional Returns: What’s the Strategy?

Understanding Pool Corp’s strategy is key to understanding its investment case. After all, it’s this strategy that has allowed the company to deliver exceptional returns to shareholders over the years. For context, even following the stock’s steep decline from its 2021 highs, POOL stock has still recorded a phenomenal return of 509% over the past decade. In contrast, the S&P 500 (SPX) has returned roughly 137% during the same period.

Pool Corp’s outperformance can be attributed to its powerful business strategy, which is centered around its comprehensive distribution network. In the business of distribution, where timely deliveries and streamlined processes are paramount, Pool Corp has mastered the art of navigating these currents to its advantage. Let’s dive into how this strategy has translated to growing financials over the years.

Supply-Chain Excellence Leads to Solid Revenue Growth

Pool Corp’s triumph in distribution begins with astute supply-chain management. This, coupled with a series of strategic acquisitions incorporated seamlessly over time, has consistently resulted in vigorous revenue growth. The company has invested in optimizing every link in the supply chain, from sourcing products to the final delivery. By identifying key nodes in the chain and implementing technology-driven solutions, Pool Corp ensures that products move seamlessly from manufacturers to end-users.

Evidently, Pool Corp’s revenues have grown at a compound annual growth rate (CAGR) of 12.2% over the past decade. This is despite the company’s long-standing, and thus mature, market-leading position.

Efficiencies Drive Even Stronger Earnings Growth

Effective inventory management is vital in the distribution business, and Pool Corp excels in this area. By employing advanced inventory tracking systems and demand forecasting, the company minimizes stockouts, avoids overstock situations, and optimizes warehouse space. This ensures that the company can promptly meet customer demands while avoiding unnecessary carrying costs. Such an efficient process has allowed the company to expand its margins over time.

Indeed, Pool Corp’s operating margin expanded from about 8.0% in Fiscal 2013 to 16.6% last year. The combination of solid revenue growth along with the company’s gradual margin expansion over the years resulted in an even stronger net income growth during the same period. Specifically, the company’s net income has grown at a CAGR of 24.8% over the past decade, notably outperforming the equivalent period’s revenue CAGR of 12.2%

Customer Relationships: Mitigating the Impact of Industry Cyclicality

The swimming pool industry often undergoes cyclical fluctuations, closely tied to customers’ discretionary spending habits, given its status as a luxury expenditure. Therefore, in times of economic downturns, there is a tendency for a reduction in spending on such non-essential items, leading to a decline in the sales of swimming pool parts and equipment.

Pool Corp’s strategy of fostering strong customer relationships has been instrumental in mitigating the industry’s cyclical nature. By prioritizing customer satisfaction and building long-term partnerships, the company has gathered a loyal customer base. So, sure, economic downturns can result in a decline in new swimming pool sales. However, the constant need for pool maintenance by its existing pool of customers (no pun intended) ensures steady and recurring revenues.

This theme is very important regarding the company’s ability to continue to grow its revenues and earnings from here.

Reasonable Valuation Signals Upside Potential

POOL stock appears to be trading at a reasonable valuation following the stock’s sell-off from its 2021 high. This is due to the company’s revenues and profits continuing to grow during this period, thus normalizing the stock’s valuation.

Notably, its current forward P/E stands at approximately 23.9x, marking a return to more conventional levels compared to the 30-45x range observed over the past three years. The majority of the potential downsides might have already been realized during this normalization process. Consequently, this could serve as a good starting point for POOL stock to resume delivering impressive returns in the long run.

Is POOL Stock a Buy, According to Analysts?

Regarding Wall Street’s view on the stock, POOL has a Moderate Buy consensus rating based on three Buys, two Holds, and one Sell assigned in the past three months. At $375.67, the average Pool Corporation stock forecast implies 6.9% upside potential.

If you’re wondering which analyst you should follow if you want to buy and sell POOL stock, the most accurate analyst covering the stock (on a one-year timeframe) is Kenneth Zener from Seaport Global, with an average return of 30.81% per rating and a 67% success rate.

The Takeaway

In conclusion, Pool Corporation’s investment case shines brightly, with the stock still trading notably lower compared to its 2021 peak. The company’s success story is rooted in its superb distribution strategy, an approach that has consistently generated exceptional returns for its shareholders. Pool Corp’s adept supply-chain management, efficiency-driven inventory control, and customer-centric focus have led to impressive revenue and earnings growth, even in the face of industry cyclicality.

In the meantime, the current, more reasonable valuation of POOL stock indicates upside potential. With the groundwork laid by its resilient business model, investors now likely have the opportunity to hop aboard POOL stock’s outperformance train without the burden of overpaying for the stock. Accordingly, I am now bullish on the stock.


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