Taking another look at Pool Corporation
This Wall Street Journal article caught my eye last week because it captures my favorite type of investment – beaten-down stocks of excellent companies.
It also mentions many stocks I'm familiar with, such as current Stansberry's Investment Advisory holding Copart (CPRT), which we recommended buying in our December 5 issue, and former holdings AutoZone (AZO) and Constellation Software (CSU.TO), which we recommended selling in our February 6 issue.
But the one I want to focus on today is swimming-pool supplier Pool Corporation (POOL).
I wrote about Pool almost two years ago in my May 9, 2024 e-mail, after a team of Columbia Business School students pitched it as a short at the 17th annual Pershing Square Challenge.
After sharing highlights from their 113-slide presentation, I concluded, "I applaud the students' excellent work and agree that Pool looks like a stock to avoid."
It was a good call, as Pool's stock is down 46% since then. And it hit a six-year low on Thursday, as you can see in this 10-year chart:
So, is the stock a buy today? The WSJ article highlights some reasons why it might be:
Not surprisingly, there have been plenty of ups and downs over the years for Pool Corp, the world's largest distributor of swimming-pool supplies. The good times have outweighed the bad ones, though. By the time Covid-19 arrived, investors had made about 50 times their money over 20 years.
Then the pandemic supercharged at-home leisure, and Pool Corp's value tripled. As of this month, its shares have given back the last of those gains.
As the article continues, regarding the stock at today's levels...
... timing matters less if Pool Corp is still a "compounder." Those are stocks with durable competitive moats, high return on invested capital, shareholder-friendly management and room to reinvest some of their cash for future growth...
Nearly two-thirds of revenue at Pool Corp is for maintenance of existing pools and its distribution ability is unparalleled. Berkshire Hathaway built a stake over the past two years and is now its second-largest shareholder.
Let's take a look at Pool's historical financial performance. We'll start, as always, with revenues and earnings over the past two decades...
You can see the COVID-driven boom and subsequent bust in the chart below. But the key thing to notice is what I've highlighted with the red arrow: the 55% growth in net income from 2019 to 2025, which is consistent with the long-term trend line:
The cash-flow statement shows a business with minimal capital expenditures ("capex") and free cash flow ("FCF") roughly tracking profitability – both good signs:
Looking further down the cash-flow statement, we can see how Pool has allocated its robust FCF in the chart below. It has a steadily growing dividend (the stock currently yields 2.5%), rising share repurchases, and one major acquisition in 2021 of Porpoise Pool & Patio for roughly $800 million:
The steady share repurchases have reduced the diluted shares outstanding by 32% over the past two decades, equal to 1.9% compounded annually:
Lastly, the balance sheet is healthy, with only $1.4 billion of net debt. It spiked by $805 million in 2021 due to the Porpoise acquisition and has been steady since then, as Pool has focused on returning capital to shareholders via dividends and share repurchases:
Overall, this is a strong financial picture. Pool is a market leader that generates strong FCF. While revenues, profits, and FCF have declined from their COVID peaks, they appear to be stabilizing – and are higher than they were before the pandemic.
Lastly, let's take a look at valuation. At Thursday's closing price of $202.93, the company has a market cap of $7.4 billion and an enterprise value of $8.9 billion.
Pool has guided to EPS of $10.85 to $11.15 this year, up slightly from $10.73 of adjusted EPS last year. Consensus analysts' estimates are at the midpoint of $11 this year, growing to $11.90 next year. So the price-to-current-year-earnings ratio is 18.4 times.
That's a modestly below-market-average multiple for a well-above-average business. So I think the stock is undervalued here... but not undervalued enough to recommend it.
My team and I will be keeping an eye on the stock. And if we ever decide to recommend it, Stansberry's Investment Advisory subscribers will, as always, be the first to know. If you're not already a subscriber, you can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. I biked 60 miles around New York City on Saturday with my buddy Andreas, who started doing long rides around the city during COVID.
It was a gorgeous day! And it was great fun biking through neighborhoods where I'd been campaigning for mayor last year – and seeing many new places I'd never been.
Here are some photos of us and a map of the route we biked:
