Bull of the Day: Pool Corp (POOL)

We’re just a few days from the Summer Solstice and the official start of Astrological Summer. Temperatures are rising across the country, and everyone wants to cool off, socialize with their friends and family and just have some good old-fashioned fun.

Swimming pools have never been more popular, and PoolCorp (POOL) distributes and sells absolutely everything that makes having a backyard pool possible.

This is an “ecosystem” story. Apple (AAPL) became a $2+ trillion market cap company not only by selling fancy hardware, but by creating a system in which once a customer makes their first purchase, they keep coming back for more. You bought a phone? How about some earbuds, a watch, some entertainment content, and on and on and on.

Though they might not seem to have much to do with each other on the surface, the swimming pool business works in a similar way. Pool construction was one of the surprise success stories of 2020 as most opportunities to gather in public evaporated, people spent much more time at their own homes and had additional disposable income left over from cancelled vacations and dinner reservations.

Having a pool in your backyard was a safe way to exercise and have fun outdoors and Americans built a record number of them – 96,000 in 2020, a 25% increase over the previous year. Waiting lists swelled for construction swelled and contractors were taking reservations up to a year in advance. It’s estimated that in 2021, an additional 110,000 private pools will be created.

You can’t go to PoolCorp’s stores unless you’re a contractor, but if you have a pool, there’s a good chance the people who built it and who maintain it for you bought most or all of their supplies and equipment at PoolCorp. Through its nationwide network of warehouses and professional-only retail locations, PoolCorp sells literally every part that goes into making a pool. Plumbing, concrete, plaster, pumps, heaters…literally everything.

Not surprisingly, PoolCorp has seen record revenues lately. This year, the consensus estimate is for them to do $4.9 billion in sales – a 25% increase over last year. Thanks to the economies of scale that come with being the biggest fish in the pond (or pool, as the case may be…) 2021 earnings are expected grow from $8.42/share in 2020 to $12.28/share in 2021.

Rising estimates help earn PoolCorp a Zacks Rank #1 (Strong Buy).

Because those big sales and earnings came partly as a result of an unexpected – and potentially limited – surge in construction, the forecasts for 2022 show only modest growth, up 6% in revenues and 3% in net profits.

I think those analyst estimates are extremely conservative. Even if the pace of construction slows, the pool party is far from over – specifically because of the ecosystem effect. Once your new pool is in the ground, the kids are having diving contests and the margaritas are poured, you’re not even close to being done spending money on it.

Just like other expensive goodies like boats and RVs, pools require a constant outlay for maintenance and repairs. Otherwise, they turn into an ugly and dangerous eyesore. Unlike boats and RVs, you can’t easily sell them to someone else without selling your entire house. Consumers don’t really have a choice but to keep spending money on their pools.

That “captive audience” aspect is an important part of the ecosystem concept – and PoolCorp’s profitability. In an inflationary environment, not only are consumers unable to choose to spend less on maintenance, they also actually have to keep spending unless they want a green swamp in the yard.

That’s important because it means that PoolCorp can pass along wholesale price increases straight to consumers. Many other businesses don’t have that kind of pricing power and have to strike a balance between losing customers and eating rising costs themselves, hurting gross margins.

A recent fire disaster at the nation’s largest producer of chlorine tablets in Louisiana illustrates this point. With supply severely limited, prices skyrocketed for the “tri-chlor” tablets that keep pools clean and clear, but pool owners couldn’t simply choose not to buy them. PoolCorp passed along the increase directly with no hit to margins.

In fact, despite rising wholesale costs, gross margins in Q1 2021 rose from 28% to 28.4% YoY. Those tablets are too expensive? Your pool professional might buy alternate sanitizing products like liquid chlorine, or he might even recommend that you convert to a salt system that turns ordinary table salt in your pool into free chlorine to sanitize it.

Where does he buy those other products and equipment to sell to you? You guessed it – from PoolCorp.

And that doesn’t even scratch the surface of the demand that’s being created for equipment. Pumps, filters, heaters and everything else that makes a pool work tend to break on a fairly regular basis.

So although POOL shares might seem to be fully valued given that they have almost doubled over the past 52 weeks, the future is as bright as a sparkling swimming pool during the dog days of Summer. With at least 200,000 brand new customers having been created over a two-year period, PoolCorp is an inflation-proof and recission-proof titan in an industry you may have never even considered before.

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