Description

One of the corners of the market we’ve been sniffing around for the past few months is the graveyard of COVID winners that have been absolutely decimated and asking two questions….are numbers finally in the right place?  and, is this a decent enough business that someday investors will once again care?  In most cases the answer is “no to both”.  However, we think one in particular ticks both boxes and has the potential to be a multi bagger from here.  We’re pitching the swimming pool manufacturer Latham (SWIM) as a long.  

The long case for SWIM from here boils down to:

• New pool construction is expected to be down about 40% from peak in 2023, back to 2018 levels

• SWIM is the largest manufacturer of fiberglass pools with about 50% market share, fiberglass pools are a secular penetration story within the industry due to their value proposition to the consumer as it relates to maintenance hassle and overall cost of ownership, as a result SWIM should be one of only three secular growth stories within the building products space, TREX and AZEK being the other two

  • To drive this point home, new pool installs in the US were down about 20% in 2022 and SWIM grew their fiberglass volumes y/y

• Fiberglass pools are also much quicker and more profitable for dealers to install and the 2023 pipeline of new dealers looks very robust, potentially driving more growth than anyone is factoring into estimates

• Their new “Measure” product allows contractors to spec a new cover in minutes vs taking hours to manually take measurements themselves, this could have big legs and reminds us of STCK introducing Ready-Frame back in 2011 which delivered pre-cut and measured framing lumber to a job site

• SWIM trades at 5x 2024 EBITDA, pool equipment OEMs get 10-12x and TREX/AZEK get 13-18x….we think SWIM is being mischaracterized 

  • Giving it 12x 2024 we think FV today is around $10

SWIM’s business and the state of the pool market

Let’s start with the overall pool market because most are probably thinking “how could you pitch a company tethered to a high ticket discretionary product like pools when we’re going into a recession and mortgage rates are 7%???”.  Our view is that the pool market is about ½ way through it’s recession with estimates for 2023/2024 baking in the other half.  It’s also important to remember that pools are very long lead time and labor intensive products, so while the category benefited from COVID it didn’t capture as much benefit as shorter cycle products that could be ripped off the shelves at HD/LOW.  

Now lets turn to SWIM’s business mix.  Liners and covers are basically break/fix products that grow with the installed base of pools.  Of the in-ground pools, 75% of this is fiberglass and 25% is “pre-packaged” vinyl pools.

Next let's talk about fiberglass pools.  As shown below they are “middle of the road” as it relates to project cost, but once installed they have a much lower maintenance and overall cost of ownership profile.  In addition, because the pools are basically just dropped into the ground they are way quicker and more profitable for dealers to install which is creating a growing dealer base.  As mentioned above, SWIM’s fiberglass volume grew in 2022 despite the overall market being down 20%, even if the category grows 1.5-2x the overall market next cycle the market will put a much bigger multiple on the company vs pure cyclical building products stocks.

It’s also worth noting that as of 2022 SWIM had 250 “core” dealers across the country.  The 2022 class saw recruitment of another 250 and management has said the 2023 enrollment had to be capped.  It takes a while for these dealers to ramp and mature but this is likely to be a key growth driver going forward.

So what is it worth?

• Since only ½ the business is fiberglass pools I’m not arguing that it’s a pure comp to TREX/AZEK

• But the liners/covers/pre-packaged businesses are solid in their own right, they just don’t have the secular growth component

• As shown below, it’s a good business when stacked up to it’s pool OEM peers (HAYW/FDR/PNR/etc) so to me it should trade at least inline with them at 10-12x EBITDA

• We think mid-cycle EBITDA here is around $150m and it should get 12x that or about $13.50 per share, thats likely a 2025/2026 number so discount it back and you'll get to something around $10

• If you think we’re totally insane to be pitching this thing given the current macro environment short FOXF against the new build exposure (if pools collapse so will $125k pick ups…and they are still at peak levels) and HAYW against the liners/covers business

Catalyst

-interest rates topping out

-hitting Q1 #s