2023-10-21 02:05:36 ET
Summary
- The headwinds facing Pool Corporation continued to show up in Q3, with sales and margin pressure.
- The company should see a better going against easy comps and with inventory issues resolved.
- That said, the POOL trades at a significant premium to other types of distribution companies.
Back in mid-March , I wrote that Pool Corporation ( POOL ) was a great company but that it was facing some temporary headwinds. The stock is down about -5% since then, versus a 9% gain in the S&P. Let’s catch-up on the name.
Company Profile
As a refresher, POOL is a wholesale distributor of pool supplies and equipment. While it has operation in the U.S. and Europe, most of its sales come from four states: California, Texas, Florida, and Arizona.
While the company serves both homeowners and contractors, most of its business comes from contractors. Approximately 60% of its revenue is derived from service & maintenance, while about 25% is from replacement & repair and around 15% from new pool construction.
Headwinds Continue in Q3
In my initial write-up on POOL, I discussed several headwinds that the company was experiencing. One was destocking in the wholesale channel after prior over-ordering as a result of prior supply chain issues that stemmed from the pandemic. While this has been a prominent issue in the apparel and footwear space, I’ve written about numerous companies in various industries that have dealt with this issue, so it is certainly not unique to POOL.
This once again showed up when the company reported its Q3 results , with its base business sales to the retail channel down -8%. However, the base business saw an improvement compared to the first two quarters of the year. Seasonal sales were down -10% for the quarter.
Overall sales fell -9% to $1.47 billion, just edging past the $1.46 billion consensus. Adjusted EPS came in at $3.50, beating analyst estimates by 6 cents.
Looking at its major year-round markets, Florida sales were down -5%, Arizona -8%, California -10%, and Texas -11%. The company faced tough comps in those markets, with each seeing double-digit revenue increases a year ago.
In my original article, I also discussed headwind in the new pool market. The company now thinks new pool units will be down -30% in 2023, a bit worse than the original -25% it originally talked about.
I also noted the potential for delays and deferment in the pool repair & replacement market. While it experienced issues earlier in the year, the company said that demand was solid for maintenance and repair despite softer demand for new pool construction and remodels. Remodel activity was down -3% in the quarter, which was better than the -10% to -15% it earlier expected.
Gross margins were -210 basis points lower to 29.1%. The company cited weaker industry demand and the end of channel inventory rationalization as the main culprits for the decline.
Based on its results and current trends, POOL narrowed its full-year EPS guidance. Adjusted EPS is now projected to be between $13.15-13.65, down from a prior outlook of $13.14-$14.14. The company initially guided for 2023 adjusted EPS of between $16.03-$17.03. It projects revenue to be down -10% for the year.
For Q4, POOL expects revenue to decline between mid- to high single digits, depending on weather and new pool construction. It is expecting Q4 gross margins of around 29%, slightly less than the 30% it expects for the full year.
For 2024, the company expects to see price increases of around 3% to 4% for next season based on equipment vendor pricing announcements to date.
Discussing his outlook for the market going forward on its Q3 earnings call , CEO Peter Arvan said:
“2023 was no doubt a kind of a crazy year, which followed a couple of years of crazy but for different reasons. We had bad weather in the beginning of the year. We had interest rates that continue to rise. And that, we think, put a crimp on new pool construction, which is turning out to be lower than what we thought it was when I was talking to you a year ago, and frankly, when we initiated guidance at the beginning of the year. I think new pool construction this year, as I mentioned, is going to be down to 30%. That's an average, right? So I think if you look at entry-level pools in some markets, it's actually down more and in some cases, significantly more. The flip side is that the higher-end pools remain solid. ... So when I look back at the macro economic environment, based on what we see today, I would tell you that I don't think new pool construction is going to drop much more. … Renovation is again that plays a little bit of that same pattern, right? The renovations that would require financing are going to be under the most pressure because of interest rates. … From a maintenance perspective, maintenance is maintenance. It has to happen. … If I look back at the beginning of the year, a couple of the headwinds we had was very tough weather in the beginning of the year, and we also had some of the inventory hangover from the previous year that was in the channel. So as I look forward, and again, too early to give you a guidance, but I'm more optimistic about next year than this year, but I also want to be clear with setting expectations. New pool construction, it's not going to take off, it's not going to grow. But I look at the headwinds that we faced, the stability of the market, and I remain confident that I think next year will not be another year of down, down, down.”
While Q3 continued to show headwinds for POOL, it also showed some signs of improvement, with base business sale declines moderating and improvement in channel inventory. In fact, the company did a great job of reducing its own inventory as well. Despite the headwinds, POOL still has a solid business that generates a lot of cash (~$750 million in OCF year to date).
Moving forward, while some headwinds such as interest rates and lower new pool sales will continue, the company should see a better year in 2024 going against easier comps, while also seeing some raised prices on the equipment it sells. In addition, channel inventory issues appear to be almost resolved, which should see a return to more normal ordering patterns.
Valuation
POOL stock trades at a 17.3x EV/EBITDA multiple based on the 2023 EBITDA consensus of $805.5 million. Based off of the 2024 EBITDA consensus of $872.1 million, it trades at around 16x. Notably, these analyst estimates are down considerably since when I last looked at the stock in June.
It trades at a nearly 22x forward EPS, with analysts projecting 2024 EPS of $14.85
It's projected to see revenue fall -10.0% in 2023, returning to 4.7% growth in 2024.
With estimates down and its stock up on the year, it trades at one the highest valuations among its distributor peers. Given its lackluster results and modest expected future growth, and don’t feel like this valuation gap is justified.
POOL Valuation Vs Peers (FinBox)
Conclusion
Despite a pretty tough year operationally, POOL has been a Teflon stock, up about 8% year to date despite the consistent lowering of guidance and analysts reducing estimates for 2024. I like distribution businesses like the one POOL is in, but this has led to a pretty wide valuation gap between POOL and other distribution companies.
The argument in the past could be made that POOL was in a more steady, predictable business, but after the past year, I feel that argument falls pretty flat. Thus, while I like the company and think it should see a rebound in business next year, its valuation is just too high compared to other distribution companies in my view. As such, my “Hold” rating remains unchanged.
For further details see:
Pool Corporation: 2024 Should Be Better, But Valuation Is High