Pool Corporation: A compounding market leader.
Opdateret: 7. aug.
Pool Corporation is a company that has long been on my watchlist, as it is a compounding market leader. If you follow my blog, it is no secret that I like compounding market leaders. I just finished reading a fantastic book called "The Intelligent Quality Investor" by Long Equity. In this book, Pool Corporation is mentioned as a high-quality company that is worth analyzing. Therefore, it is what I decided to do.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly describe the company and if it has a moat. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Pool Corporation.If you would like to copy my portfolio or view the stocks in my portfolio, you can find instructions on how to do so here. I don't own shares in any of their competitors either. If you want to buy shares or fractional shares in Pool Corporation, you can do so at eToro.
Pool Corporation was founded in 1981 in New Orleans and was initially known as South Central Pool Supply. In 1993,the company partnered with a private equity firm and rebranded itself as SCP Pool Corporation. Pool Corporation is the world’s leading wholesale distributor of swimming pool equipment, parts, and supplies, as well as related outdoor living products. Pool Corporation operates over 410 locations worldwide and distributes its products to approximately 120,000customers around the world. However, approximately 90% of its business is in the United States. Pool Corporation primarily serves the contractor market, as approximately 80% of their sales are made to contractors. Pool Corporation divides its sales into three segments: Retail and Maintenance Service (60% of sales), New Pool Construction (20% of sales), and Replacement and Refurbishment (20% of sales). The large retail and maintenance services segment means that Pool Corporation receives a significant amount of recurring income. Being the world’s leading supplier means that Pool Corporation has a brand moat, as customers trust the brand.
Their CEO is Peter D. Arvan. He joined Pool Corporation in 2017 and became the CEO in 2019. Prior to joining Pool Corporation, he served as the CEO of Roofing Supply Group. He had previously held various management positions in SABIC Polymershapes. He has an undergraduate degree from the State University of New York Institute of Technology.When he was introduced as the CEO of Pool Corporation, it was noted that his extensive experience in managingdistribution businesses is one of his key strengths. It is difficult to find extensive information about Peter D. Arvan online. However, since he assumed the role of CEO, Pool Corporation has successfully increased its margins, suggesting that he has performed well in his position. Furthermore, when reading through the earnings call transcripts, I was impressed by the candidness of Peter D. Arvan and the rest of the management team in their responses to questions. They demonstrated a willingness to take responsibility in a challenging macroeconomic environment, acknowledging that it is their duty to navigate the company through these obstacles and ensure strong financial performance for years to come. Hence, despite the limited information, I am confident in the management’s ability to move Pool Corporation forward.
I believe that Pool Corporation has a strong brand moat. I really appreciate the management’s willingness to take responsibility in guiding the company through challenging macroeconomic times. Now, let us investigate the numbers to determine if Pool Corporation meets our criteria for a strong competitive advantage. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number I will investigate is the return on investment capital, also known as ROIC. Ideally, you would like to see a return on invested capital (ROIC) above 10% in all years. Pool Corporation has consistently achieved a Return on Invested Capital (ROIC) of over 10% annually for the past 10 years. It is even more encouraging that Pool Corporation has managed to deliver a return on invested capital (ROIC) above 20% each year since 2015. The ROIC shows that Pool Corporation is a great company that consistently delivers a high ROIC, which is something I really appreciate as an investor.
The following numbers represent the book value plus the dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. Pool Corporation has experienced some fluctuating years between 2013 and 2016, but they have managed to achieve significant growth in their equity since 2016. It is even more encouraging to see that they have managed to continuously grow their equity year after year.
Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Not surprisingly, Pool Corporation has consistently generated positive free cash flow each year over the past 10 years. Leveraged free cash flow is not as high as one would have hoped, but this is attributed to the nature of Pool Corporation’s business.It is worth noting, though, that the levered free cash flow margin has been higher since 2019 than it has been in previous years. The 7.1% figure from 2022 has only been surpassed in 2019 and 2020. Free cash flow yield is on the lower side but higher in 2022, reaching 3.3%, which is the highest since 2016 (it was also 3.3% in 2019). It could indicate that Pool Corporation stocks can now be purchased at a more favorable price than in the pastcouple of years, but we will discuss this further later in the analysis.
Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a 3-year period. This can be assessed by calculating the ratio of long-term debt to earnings. Doing the calculation on Pool Corporation, I can see that Pool Corporation has 1.83 years of debt. It is below3 years, so debt is not something I am worried about when it comes to Pool Corporation.
Like every other investment, there are risks associated with investing in Pool Corporation. One risk is related to macroeconomics. If we experience a recession, it is possible that people will start to prioritize their pools less. It may mean that they do not maintain it as much as they did before, which would negatively impact Pool Corporation. We also observed a decrease in new pool installations. In 2021, there were 117,000 new pool installations. In 2022, the number dropped to 98,000, and management anticipates it to further decline to around 80,000 in 2023. It not only hurts the New Pool Construction segment, but it could also harm the Retail & Maintenance Service in the future, as there will be fewerpools that require maintenance. Another macroeconomic risk is that inflation leads to increased costs in wages, transportation, and real estate. They are susceptible to the weather. No matter how great management is, they cannot control the weather. Pool Corporation generated 59% of their net sales and 67% of their operating income in the second and third quarters of 2022.Unfavorable weather during these periods would have a significant impact on their outcomes. If spring arrives late, thecustomers of Pool Corporation would start using their pools later. This would result in a longer time for the company to begin maintaining the pools, which in turn affects their sales. Dependent on maintaining a good relationship with suppliers. In their annual report, Pool Corporation mentions that it is critical for a distribution company to maintain a favorable relationship with its suppliers. Their three largest suppliers account for approximately 38% of the products that Pool Corporation sold in 2022. If one or all of these suppliers decide to sell their products directly to retailers or other end users, it would have an impact on the business of Pool Corporation.
There are also a lot of potential for Pool Corporation moving forward. Yearly new pool installations are far below the peak. As mentioned, in my previous discussion about risks, management expects that the number of new pool installations will continue to decrease in 2023. But looking long-term, new pool installations may be a great catalyst for Pool Corporation. New pool installations peaked in 2005 with over 200,000 installations per year, which is significantly higher than the most recent peak in 2021 with 117,000 installations. The reason why new pool installations could reach previous highs is that home improvement spending is increasing, and pools and outdoor living consistently rank among the top features desired by homeowners. Increased value of pool content. New pools are incorporating higher-value, energy-saving features, technology, and automation, which are products that old pools did not use. Pool Corporation estimates that 70% of existing pools, over 3.5million, have no automation at all. Furthermore, the average age of the installed pool base is over 22 years old, indicatingthat there is potential for many pool owners to upgrade their pools in the future. Once existing pools are renovated, they are upgraded with higher-value content and automation. Upgrading Pool360. Pool360 is Pool Corporation’s platform that allows their customers to receive pricing, product availability information, and enter orders in real time. Pool Corporation recently released the latest version of their Pool360 platform, which includes new features designed to enhance the customer experience. This update further strengthens their competitive advantage by offering a service that sets them apart from their competitors. Customers seem to like Pool360, as it now accounts for 11% of their total sales.Furthermore, Pool Corporation will also launch their Pool360 water solution software in 2023. Management expects that this launch will enable them to gain market share in the maintenance and repair market.
All right, we have gone through the numbers, potential, and risk regarding Pool Corporation, and now it is time for us to calculate a price for Pool Corporation. To calculate the price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I don't want to go through the entire calculation here. I chose an estimated future EPS growth rate of 15% (management expects to grow EPS by mid-teens in the long term). Estimated future PE is 30 (which is double the growth rate, as the historical PE for Pool Corporation has been higher), and we already have a minimum acceptable return rate of 15%. Using the formula I described in “MY STRATEGY”, I calculate the sticker price (also known as fair value or intrinsic value) of $561. To incorporatea margin of safety of 50%, we divide this value by 2. Therefore, we aim to purchase Pool Corporation at a price of $280,50 (or lower), using the Margin of Safety price.
Our second method for calculating a purchase price is the TEN CAP price, which is also explained in "MY STRATEGY".To do so, we need some numbers from their financial statements. Keep in mind that all numbers are in millions. The Operating Cash Flow last year was 485 million. The capital expenditures were Capital Expenditures was 44 million. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance.I couldn’t find it, so as a rule of thumb, you can expect 70% of the capital expenditures to be used on maintenance. This means that we will use 30.5 million in our further calculations. The tax provision was $237 million. We have 39,069 outstanding shares. Hence, the calculation will be as follows: (485–30.5 + 237) / 39.069 x 10 = $176,99 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Pool Corporation’s Free Cash Flow Per Share at $11,30 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $178,38.
Pool Corporation is a great company because it is a market leader in a sector that is expected to experience long-term growth. I believe that Pool Corporation has excellent management, not only because of the recent results they have achieved, but also because they appear to be very transparent during earnings calls. They are not afraid to takeresponsibility for guiding the company through a challenging macroeconomic environment. The macroeconomic environment poses a short-term risk for Pool Corporation. If a prolonged recession occurs in the United States, it will have an impact on Pool Corporation’s results. It is also a risk that the weather can impact their results, and unfortunately,they have no control over it. However, there are many things that are in favor of Pool Corporation. In the latest earnings call, management stated that they are still gaining market share. They also mentioned that if the Pool360 water solution software is successful in capturing market share in the maintenance and repair industry, it will result in increased recurring income for the company. It is no secret that I prefer investing in high ROIC (Return on Invested Capital) companies. If Pool Corporation’s stock price reaches my predetermined Margin of Safety price of $280.50, I will initiate a position.
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