Description

Poolcorp, a leading pool supplies distributor is trading at historical multiple lows due to recession fears and a housing slowdown. However, POOL has proven its resiliency through cycles, and currently sits in an interesting spot, with a large pool base, new market entrance and a continued dominant position. Today, POOL represents a 57% upside opportunity by 2024.

Company Overview

Poolcorp is the world’s largest wholesale distributor of swimming pool supplies, equipment and related leisure products and is one of the leading distributors of irrigation and landscape products in the United States. Poolcorp has over 400 sales centers in the US, Europe and Australia, and sells over 200,000 products. The Company was founded in 1993 and is based in Covington, Louisiana.

Diversified business makes it more sustainable than other building materials companies

Though it might look like a company that is highly exposed to new home construction, around 80% of Poolcorp’s revenue comes from an already installed pool base. Additionally, 60% of the business is non discretionary and it is tied to maintenance and 20% to renovations of the existing base. Though new pool construction is cyclical, renovation is less so, and maintenance is not cyclical at all. 

Despite the new pool construction and remodel had a pull forward during the pandemic, this increase in pool count is a positive for POOL as it now has a larger base to capture for its maintenance business in the future. The Company’s maintenance business grew 5% during the ‘07-’09 period, proving its resiliency. Lastly, Poolcorp has been growing its commercial pool business at ~15% since 2014, capturing a larger share of a $2bn market that is less cyclical than residential (~10% market share today).

Favorable macro and consumer trends 

Migration in the US towards the Sunbelt states continues to grow and, according to the US Census Bureau, it is expected that population growth in the South and the West would be 18% and 21% respectively through 2040. These are states where the majority of pools are, where pool season is the longest and POOL is ideally located in these markets to take advantage of this trend.

Today, the average age of installed pools is over 20 years, playing into POOL’s business strengths of maintenance and renovation vs. new pool construction.  Still, new pool construction increased to approximately ~150,000 new units in 2021, but construction levels are still down ~65% compared to peak historical levels (an average of ~200,000 new units annually were built in the years leading up to the recession).  For example, based on $850 spent per year on maintenance, a single pool should generate $17,000 of potential revenue over a 20 year lifespan. If POOL is able to maintain its market share of 37%, it should capture around ~44,000 new pools, which represents an opportunity of about $47mm of annual revenue or $740mm over 20 years, just based on 2021 new builds.

New pool construction and renovations are coming with increased content value spending. Based on Company’s estimates, the addition of automation controls, sanitizing systems, heaters, robotic cleaners, among others, have grown around 100% between 2019 and 2021, and usually these products come with a higher gross margin. 

Entrance into the retail segment increases distribution moat, adds a more resilient segment and brings higher gross margin opportunities 

In December 2021 POOL closed its largest acquisition when it acquired Porpoise Pool (~$250mm of revenue). Based out of Clearwater FL, Porpoise has two main businesses: a distributor and chemical operation, and Pinch a Penny, a pool products retailer. This represents POOL’s entrance into the retail market which mostly serves the DIY crowd (a $3bn opportunity). The Company is targeting 8-12 new franchises per year in the Southeast, leveraging its nationwide distribution, operational expenses synergies. Most importantly, the Company expects its gross margins to further increase from ~30%-32% thanks to franchise fees and better chemicals sourcing. Lastly, the entrance into the DIY retail business could serve as an offset in a downturn as more people shift to maintaining the pool themselves. 

Strong moat, pricing power and operating leverage

Despite being a highly fragmented industry and where many products are commodities, POOL still maintains a leadership position in the pool supplies distribution. One of its main advantages is SKU breadth (over 200,000 products) and availability. During the peak of the pandemic, when many competitors ran out of stock, POOL was the only player in town with the products. A former POOL Zone manager put it this way: “I feel like POOLCORP probably did better than anybody else at having product. So they were probably getting customers simply because they had product. And kind of that goes along with that is you had a lot of customers that maybe was a loyal Gorman or a loyal Horner customer now, they can't get everything they need over there.” (Source: Tegus)

In this inflationary period, POOL has been able to pass along costs to customers and expects to continue doing so in the near term. In addition, thanks to inventory that doesn’t go stale, POOL has been able increase its margins as they can build they can build up inventories at lower prices and pass along further price increases as inflation expectations increase.

As a constant acquirer, POOL has perfected its M&A playbook and has demonstrated its capacity to improve sale center performance once they are part of the Company’s portfolio. In 2019, the Company had only 96/364 (27%) centers with an operating margin above 16%. In 2022 the count was 315/365 (86%).

Valuation

Poolcorp is currently trading at ~12x FW EV/EBITDA, below its historical average multiple of 15.0x (1995-2022 average), and 19.0x 10 year average. Assuming the Company trades back to 15.0x, the stock should trade around $448 by year end 2024, a 57% upside, if they trade back to its 10 year average multiple of 19.0x, the shares should trade around ~$570, a 100% upside from today’s price.

Risks

• Amazon: as the majority of its business is through distributors this reduces the Amazon risk. Industry experts indicate less than 5% of annual sales for pool supplies and equipment are conducted online. (Jeff research)

• Revenue pull forward: though there was a large increase in new pool construction and renovation during the pandemic, 60% of POOL’s business is maintenance, which is more stable and this new base of pools provides future maintenance revenue.

• Entry of Leslie’s into PRO segment: Leslie’s, a leading retailer started building its wholesale and distribution business a couple of years back, still it is relatively small vs. Poolcorp.

• Housing market: with mortgage rates around 7% and a slowdown in the housing market, it is obvious that there would be a slowdown in new pool construction. Still, management believes that a 20% decline in either new construction has an impact of ~4%, but this would be offset with price increases in maintenance due to inflation, expecting flattish sales for 2023 if this happens.

Catalyst

Housing market stabilizes and new pool construction doesn't decline as much as expected

Large growth in retail segment.