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Pool Corporation: A compounding market leader.

Opdateret: 9. jul.

Pool Corporation is a company that has long been on my watchlist because it is a dominant market leader that is approximately five times larger than its biggest competitor. However, Pool Corporation doesn't rest on its laurels; it continues to make investments to promote its future growth and gain market share. If you follow my writings, it is no secret that I like compounding market leaders that continue to invest to promote growth and gain market share.

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 start by mentioning that at the time of writing this analysis, I do not own any shares of Pool Corporation. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of Pool Corporation's direct competitors either. Thus, I have no personal stake in Pool Corporation. If you want to purchase shares or fractional shares of Pool Corporation, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

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 439 locations in 12 countries worldwide and distributes its products to approximately 125.000 customers globally. However, approximately 93% of its business is in the United States. Pool Corporation primarily serves the contractor market, as approximately 82% of its sales are made to contractors. Pool Corporation divides its sales into three segments: Repair and Maintenance Service (62% of sales), Replacement and Remodeling (24% of sales), and New Pool Construction (14% of sales). The large retail and maintenance services segment means that Pool Corporation receives a significant amount of recurring income. Pool Corporation is approximately five times larger than its nearest competitor and has the largest, most integrated distribution network in the pool industry. Given its size and extensive reach, Pool Corporation has unparalleled capabilities within the sector, which is what gives the company its moat. According to its CEO, Pool Corporation's competitive position has never been stronger. The company's size and execution allow it to provide unmatched customer value and support, which will enable Pool Corporation to continue gaining market share. Thus, Pool Corporation's moat could expand in the future.

The 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 at 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 managing distribution businesses is one of his key strengths. It is challenging to find comprehensive information about Peter D. Arvan online. Since assuming the role of CEO, Pool Corporation has successfully increased its margins, indicating that he has performed well in his position. Furthermore, when reading through the earnings call transcripts, I was impressed by the candor 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. Furthermore, I also liked that he mentioned in an earnings call that year-over-year margin improvements are not important, as it would likely hinder the ability to invest in longer-term programs. Investors should understand that Pool Corporation is here for the long haul and is not going anywhere. While we don't have much information about Peter D. Arvan, his results have been great. I appreciate his candidness and long-term mindset. Thus, I am very comfortable with Peter D. Arvan leading Pool Corporation moving forward.

I believe that Pool Corporation has a strong moat. I really like the management as well. Now, let us analyze 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 invested capital, also known as ROIC. Ideally, you would like to see a return on invested capital (ROIC) above 10% every year. 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. It is worth noting that the Return on Invested Capital (ROIC) decreased slightly in 2023, which is attributed to factors that will be discussed later in the analysis. I'm not concerned that ROIC decreased slightly as it is still above 20%, and because ROIC will fluctuate over a period of time. I am encouraged by Pool Corporation's consistent high Return on Invested Capital (ROIC) over the past decade.

The following numbers represent the book value + 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 year-over-year percentage growth. Pool Corporation has experienced some fluctuating years between 2014 and 2016, but they have managed to increase equity every year since 2016, which is an encouraging sign. Thus, these numbers are another proof of the consistency of Pool Corporation.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected 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. It is very encouraging that Pool Corporation managed to deliver its highest free cash flow ever in 2023, almost doubling from the previous all-time high in 2022. Levered free cash flow may seem low, but this is attributed to the nature of Pool Corporation's business. Levered free cash flow margin has been higher in the past five years compared to the first five years, which is an encouraging development. Furthermore, it reached a new all-time high in 2023, which is yet an encouraging sign. Finally. Free cash flow yield is now the highest it has been in the past five years, indicating that the shares are not particularly expensive. However, we will revisit this point later in the analysis.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. This can be assessed by calculating the ratio of long-term debt to earnings. Upon analyzing Pool Corporation's financials, I have determined that the company has a debt-to-earnings ratio of 1,95 years. Hence, debt is not a concern for me.

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Like every other investment, there are risks associated with investing in Pool Corporation. One risk is related to macroeconomics. Macroeconomics affects Pool Corporation. Management has mentioned that higher borrowing rates and recent inflation have increased the cost of building a swimming pool to approximately $80.000. Consequently, management expects budget-conscious consumers to likely stay on the sidelines. Management has 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 in 2023, it dropped to 75.000, representing an almost 25% decline from the previous year. It not only hurts the new pool construction segment, but it could also harm the retail and maintenance services in the future, as there will be fewer pools that require maintenance. Macroeconomic factors have significantly impacted the European market in 2023, with sales declining by 15% primarily due to the rapid escalation of energy costs resulting from the war in Ukraine. They are susceptible to the weather. No matter how great management is, they cannot control the weather. Unfavorable weather conditions can affect Pool Corporation. One example is the poor weather in the first quarter of 2023, which resulted in a 15% decline in sales compared to 2022. This was due to delayed pool openings in many of Pool Corporation's seasonal markets, leading to higher than normal inventory levels across the industry. Unfavorable weather results in reduced chemical and maintenance needs. Thus, it resulted in an abnormal selling environment during the first half of the year in 2023, which affected the profitability of Pool Corporation. Therefore, unfavorable weather conditions may not only delay pool openings but also shorten the pool season, resulting in reduced demand for Pool Corporation's products. Dependent on maintaining a good relationship with suppliers. In its 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 39% of the products that Pool Corporation sold in 2023. 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 Pool Corporation's business. Another factor that could impact Pool Corporation in relation to its suppliers is the potential loss of a key supplier due to financial insolvency or other factors. In such a scenario, Pool Corporation may face higher supply costs or disruptions in finding alternative sources that adhere to their quality and control requirements, potentially affecting their profitability.

There is also a lot of potential for Pool Corporation moving forward. Yearly new pool installations are far below the peak. There has been a decrease in new pool installations since 2021, 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, 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. The ever-growing installed base of pools all need maintenance, which translates to recurring revenue for Pool Corporation. Additionally, Pool Corporation continues to gain market share in the maintenance category. Renovations. Pool Corporation estimates that renovation and remodeling activity should remain stable in most markets, with approximately 10% of the installed base considering renovation on an annual basis as surfaces wear out or require a more contemporary appearance. Equipment becomes outdated and eventually becomes uneconomical to operate, maintain, or repair. Once pools are renovated, they incorporate higher-value, energy-saving features, technology, and automation, products that old pools did not utilize. Pool Corporation estimates that 70% of existing pools, which amounts to over 3,5 million, have no automation at all. Furthermore, the average age of the installed pool base is over 22 years old, indicating that there is potential for many pool owners to upgrade their pools in the future. The POOL360 platform. Orders processed through Pool Corporation's B2B POOL360 platform continued to grow and now account for 14% of Pool Corporation's total sales. Moreover, they are expanding at a rate faster than Pool Corporation's overall net sales. Pool Corporation continues to enhance its POOL360 platform. For example, in 2023, Pool Corporation launched its POOL360 water solution software. The water software solution provides best-in-class in-store and mobile water analysis. It means that it enables all of Pool Corporation's dealers to provide consistent and accurate advice to pool owners and operators. This advice offers solutions that will boost demand for Pool Corporation's private label chemical products and enhance brand awareness. As the POOL360 platform continues to improve, more users will utilize it, leading to a wider range of solutions. This, in turn, will drive up demand for Pool Corporation's products.

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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 13,35, which is from the year 2023. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 15% in the next five years. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Pool Corporation's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $400,50. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Pool Corporation at a price of $200,25 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 888, and capital expenditures were 60. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 42 in our calculations. The tax provision was 165. We have 38,355 outstanding shares. Hence, the calculation will be as follows: (888 – 45+ 165 / 38,355 x 10 = $262,81 in Ten Cap price.

The final calculation is referred to as 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 $21,41 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $337,97.

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 and have a long-term mindset. The macroeconomic environment poses a short-term risk for Pool Corporation, but it is expected that macroeconomic conditions will eventually improve. It is also a risk that the weather can impact their results, and unfortunately, they have no control over it. It means that results can fluctuate year over year, which is something one needs to accept when investing in Pool Corporation. Finally, Pool Corporation is dependent on its suppliers. However, being the largest company in the sector, I believe suppliers will prioritize maintaining a good relationship with the company. Pool Corporation is currently experiencing a decline in the construction of new pools, which is attributed to macroeconomic factors. However, once the macroeconomy improves, there is a high likelihood that new pool constructions will increase again. Pool Corporation will benefit from the continuous growth of installed pools because these pools require maintenance. Furthermore, renovations of older pools are constant in all markets. Once pools are renovated, they are also upgraded, and customers purchase these upgrades through Pool Corporation. As POOL360 continues to expand, it provides Pool Corporation with an opportunity to enhance the demand for its products, potentially leading to increased market share in maintenance services, which generate recurring revenue. I believe that Pool Corporation could be a fantastic long-term investment, despite potential fluctuations in the market. I will purchase shares in Pool Corporation if it reaches the Payback Time price of $338. I may even consider purchasing shares before that, below $400, which is below the intrinsic value based on all my calculations.

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I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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