Description

Deep down you are no different than Clark Griswold. You want a pool. Indeed, with covid and its many variants and the breakdown of urban centers, there really is no better place to be than kicked back in a lounger, next to that pool, behind your house. Splashing around you is your adoring family; adoring that is, because you blessed their lives with a pool.  https://www.youtube.com/watch?v=8qmFSMbwyFM

Of course, the dream is one thing. Paying for it is another. Fortunately, a big year-end bonus is a shoo-in because you created a non-nutritive cereal varnish that's semi-permeable. It's not osmotic, but it coats and seals the flakes and prevents milk from penetrating. It's a crunch enhancer. Your good work mens your year-end bonus will cover the cost of the new pool. https://www.youtube.com/watch?v=5DdqIaOhpJg

Unless your boss is a cheapskate and your only bonus is a membership to the Jelly of the Month Club. Then the bonus won’t cover it. https://www.youtube.com/watch?v=TQXuazYI_YU

Fortunately, in the age printing presses and MMT you won’t need Cousin Eddie to kidnap the boss to get the money to pay for it. Uncle Powell can just press a button and print it for you.

And that’s exactly what Uncle Powell, did and now your portfolio is up more than enough to pay for the pool, probably a few times over. Well, it turns out you’re not the only one with the idea of spending that Federal Reserve bonus, or “brrr” money, on a pool:

WSJ: Pool Demand Exploded in the U.S. During Covid—Even in Chicago

https://www.wsj.com/articles/pool-demand-exploded-in-the-u-s-during-covideven-in-chicago-11629484270

I’m here to tell you that once that pool is in the ground it isn’t going anywhere. You are going to have to maintain it. Forever.

If you don’t keep the water clean, you’ll need to spend extra on special chemical treatments to get it clean. Hopefully, you didn’t let it go long enough that it ruined your expensive pool pump and equipment.

Tired of that pool and want a little break from maintenance? You’re not likely to drain it. Doing so creates risk of accident or injury from falls, plus the possibility of structural failure.Done with the pool and want to make it go away entirely? Nope. It’s expensive and difficult to decommission a pool and doing so typically detracts from property value. You’re stuck with it. You’re stuck with maintaining it. You’re also stuck with an average annual spend on essential, non-discretionary maintenance products in the range of ~$800 a year.

To assist with that ongoing maintenance is Leslie Pools, with 946 locations in 38 states. Founded in 1963, Leslie (LESL) is the only national scale, residential-focused, direct-to-consumer company that provides all the pool and spa equipment and chemicals needed to maintain your pool.  The $800 per pool maintenance estimate above I take from a Leslie company presentation.

The bull case to own Leslie equity is that the stock has the potential to be a very long-term holding and a solid compounder. In fact, if publicly traded peer, Universal Pools, serves as any benchmark that would be the case. Universal Pools (POOL) is the leader in commercial distribution of pool and spa care products and chemicals. (LESL is residential/consumer.) The link below identifies POOL equity as ranking number 15 among the best performing stocks of the previous trailing twenty years dating backwards from late 2019. https://decodingmarkets.com/best-performing-stocks-20-years/

I don’t need to report that in an age of equities of companies involved in autonomously driven electric automobiles (some of which have sales, none of which are autonomous), commercial space travel (very nearly into space, not actually quite there) and meat made from peas (no thank you), that Universal Pools and, by extension, Leslie, are boring businesses. However, a click of that link above and a review of the list of these top performing equities of that twenty-year period includes all manner of boring business.

Clearly, if selected properly, the equity of a boring company can be good. Quite good. Other boring names on the list include NVR, CACC, VTR, and ROST. The list only includes the top fifteen names. I’m imagine that all manner of snoozer businesses appear in the next fifteen, thirty or forty-five names on the list.

Consistent, predictable growth with minimal down years is part of the attraction. The LESL company presentation notes that the company has had 57 consecutive years of sales growth and, since 2001, a 7.1% sales CAGR. They grew revenue year over year both during the dot-com bust and during the great recession. I’m sure there is some M&A included in that growth, but it speaks to the consistency of the business: pools must be maintained. 

By comparison, POOL has averaged 18.5% annual revenue growth since 1991. Undoubtedly their growth includes M&A as well. POOL also posted positive revenue growth throughout the great recession and in 2002 during the dot-com boom (Don’t have enough data to calculate 2001 POOL revenue growth.) Again, these are good consistent businesses.

At $22.00 LESL stock trades at 16.0x ev/ebitda on my full-year 2021 which ends in September, a few weeks from now. Thus, the current quarter is the company’s Q4 2021. It’s not that cheap for a newly IPO’d company in a sleeper business segment that isn’t shooting anything into space. It’s just keeping brown water and algae from growing in the hole in your backyard that you filled with water. However, POOL trades at 27x ev/ebitda according to EIKON.

LESL needs time to trade as a public company, hit numbers, not blindside either sell or buy side, and in time valuation may expand somewhat. However, LESL does not need to get a POOL valuation to be a winner. But over the next one to two years if earnings and growth prove predictable there is reason to see some expansion in ev/ebitda multiple from 16x so long as there is not a bear market. As for the bear market you need to make that call.

Setting aside the vague term of compounder and the twenty-year horizon, I’ll focus on the next couple years and what upside I see over that period. If the multiple stays at 16x ev/ebitda I get a $33 stock on my September 2023, full year earnings. That’s exactly two years out and ~50% upside. At an 18 multiple I get a $37 stock, or ~66% upside. Factored into those valuations is a $4.2b market cap, $797m in debt as of Q3 and $214m in cash.

Leslie IPO’d in October 2020 and since then has traded in a channel between $20 and $30. It is currently at the low end of that range. It’s been pushed down over the past couple days due to a secondary from one of the two large private equity holders, probably L Catterton. The other large holder is GIC Private Limited. I do not know them or their intentions. Post this secondary their combined holdings should be approximately 32%, but potentially down to about 30%. I assume they keep selling. They made a sale back in June, too.

If one was looking for a shorter-term position, then should the stock trade to ~$30 it would be fairly valued on 2022 to 2023 earnings and it might makes sense to recycle capital at that point.

Over the past 25 years, I failed to buy POOL, in spite of looking at it countless times. It never quite got to a level my inner Ben Graham deemed cheap. Every time I took a pass, I proceeded to watch it sail onward and upward without me.Now that I have taken the plunge and purchased LESL I know with absolute certainty it will get cheaper. It will probably break that $20 dollar support level it’s had since it began trading. If you take a pass on LESL, particularly because of valuation, I hope you’ll set a price alert a few points lower to cause you to review the name should it trade down. Absent a recession, it should be a good buying opportunity.

Of course, if the stock does break long-term support, you may have a great opportunity to start a position. Me, however, in my mind’s eye, will probably be seeing this:

But absent any extraordinary thesis breaking events, I suspect the downside will be temporary and the stock will eventually recover.

My numbers:

My earnings estimates will need sharpening as I get to know the company over the next few quarters. My revenue growth estimates drop from 26% in fy 2021 (sept) to 15%, 12%, 10%, 8%, 6%, 4% spread over the next ten years. Some of the near-term large percentage increases are due to rising chlorine costs, but business is strong underneath. An incremental growth driver this year and last is that people are using their pools more often due to covid which in turn drives incremental sales.

In the last quarter, the company lost some sales due to inability to access sufficient chlorine supplies. However, unit sales were still very strong. This seemed to cause the stock to drift back towards the bottom half of its trading channel. I kind of get it, but only because the company is new. POOL’s stock isn’t having any problems making new highs and at a much higher valuation. Upside earnings potential likely comes from M&A.

The chorine shortage is due to damage to a chemical plant due to Hurricane Laurel. I don’t know when this reverses and I need to learn more about it. I wanted to post this now while the secondary is being priced. In any case, LESL (and POOL) will be much better able to get their share of chlorine relative to independents.

As check I did a DCF. Before you go bonkers in the comment section about what a joke a DCF is, I generally don’t bother with this exercise either because I, as well as anyone, can make a DCF spit out anything I want it too. However, in the case of an asset with predictable and consistent free cash flows it serves as a viable check, in my view, albeit with very wide error. Disclaimers aside and plugging in POOL’s beta of 0.71 and using terminal growth of 2% and a wacc of 5.67% I get a $43 stock. Raising terminal growth to 2.5% yields a $48 stock and 3% yields a $55 stock. I feel like I’m not stretching the terminal growth given the long-term growth history of both LESL and POOL and how consistent that growth has been.

Sales mix is 45% chemicals, 31% equipment and parts and 24% other; fifty-five percent of sales are exclusive or owned brands. Eighty percent of sales are non-discretionary. 26% if through their growing on-line channel, which seems impressive to me.

As a company nearly national in scope (38 states), it has more resources than its local, independent peers and it is putting that muscle to good use. The company has a loyalty program which extends to about 60% of customers. Loyalty members have a higher spend, than those not in the program. Their growing on-line, digital sales channel is now up to 26% of total sales. Their AccuBlue in-store water testing service and AccuBlue home testing device helps pool owners properly maintain their pool chemicals and converts tests to sales. As online sales and testing services grow, both in-store and home connected testing, customers are going to expect these services. I need to spend more time getting to know and understand these competitive offerings.

Taken together all the things a Leslie can do, will make it challenging for a local, independent operator to keep pace. I suspect the better of this lot will become targets for acquisition.

I must disclaim, that though American, I live in Mexico and have not yet been to a Leslie Pool store. I will on my next trip, but that is happened yet. Also, though I have a pool, I have never personally maintained one. Please consider these as risks.

Here are some additional risks:

• ·       The company is 57 years old, but in its current publicly traded form, has only been trading for a year. There always seems to be unknown, unknowns that only become known after a year or more of trading. However, we are a full year out and will soon have a second 10K.

• ·       The company is likely to have slower growth, but stable earnings in a recession, given both its own history and that of POOL, but the stock will still trade down. POOL could be a possible hedge, but so good any number of more cyclical home leisure activity related equities. SWIM actually makes the pools. That may be a better short. However, TREX or BC.

• ·       Chlorine supply becomes more of problem than it already is. Again I need to dig into this.

• ·       Continued exit of private equity is a drag.

Catalyst

Homeowners continue to maintain their pools. Leslie continues to provide their chemicals and equipment. Company continues to take share from locals and independents. New stores. M&A.