Pool Corporation POOL is likely to benefit from its base business, remodeling and replacement activities and expansion efforts. However, inflationary pressures and coronavirus-related woes are a concern.
Let us discuss the factors that highlight why investors should retain the stock for the time being.
Factors Driving Growth
Pool Corp is gaining from the solid performance of its base business segment. In second-quarter 2022, the company’s Base Business segment contributed 95.5% to total revenues. During the quarter, revenues in the Base Business segment increased 10.2% year over year to $1,964 million. Elevated demand for outdoor living products benefited the company. The segment's gross margins improved 100 basis points year over year, backed by its pricing management, supply chain activities, products and customer mix.
Pool Corp continues to benefit from remodeling and replacement activities. During second-quarter 2022, building materials sales increased 22% year over year. The company is benefiting from strong demand in construction and remodel markets. During the second quarter of 2022, the company reported solid demand for connected and smart technology products like automation, so coronation, variable speed pumps, robotic cleaners and customizations. Given the products’ importance in repair, replacement, new construction and remodeling activities, the continuation of demand is likely to boost the top line in the upcoming periods.
The company has been benefitting from a rise in equipment and chemical sales. During the second quarter, equipment and chemical sales increased 42% and 25% year over year, respectively. The upside was primarily driven by solid demand for heaters, pumps, filters, lighting and automation. Growth in Chemical sales was primarily backed by a better inventory position concerning trichlor. The company believes that the flexibility of the new work-from-home norm is likely to act as a catalyst for investments in home improvements. Also, benefits from new products (such as automation and the connected pool) and the addition of NPT centers and capabilities are likely.
Pool Corp focuses on expansion initiatives to boost revenues. The company is foraying into newer geographic locations to expand in existing markets and launch innovative product categories to boost market share. It is trying to grow through various acquisitions. During first-quarter 2022, the company boosted its presence in the DIY market segment by acquiring Pinch A Penny. During the second quarter, POOL opened one new Pinch A Penny franchise store, bringing the total store count to three. The company stated that it initiated work on chemical sourcing and product management and that it is reporting brisk store traffic and solid demand across the platform.
Given the synergies coupled with its robust development pipeline, the company expects the initiative to drive growth in the upcoming period. The company anticipates acquisitions in new locations to contribute 5-6% to Pool Corp’s revenue growth in 2022.
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In the past year, shares of Pool Corp have fallen 25.7% compared with the industry’s 60.3% decline.
The COVID-19 pandemic has significantly impacted economic activity and markets throughout the world. Risks stemming from the resurgence of COVID-19 cases in some markets, new stay-at-home orders or government mandates and unfavorable economic conditions triggered by the crisis could affect the business.
Pool Corp is continuously shouldering higher expenses, which are denting margins. Inflationary cost increases in compensation, freight and rent are leading to higher expenses. During the second quarter, the cost of sales came in at $1,389 million, up 12.4% from the prior-year quarter’s levels. Selling and administrative expenses increased 16.3% year over year to $247.9 million. We believe the company must work hard to cut expenses to achieve high margins. For 2022, the company anticipates inflationary pressures to be in the range of 10-11%.
Zacks Rank & Key Picks
Pool Corp currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the Zacks Consumer Discretionary sector are Marriott Vacations Worldwide Corporation VAC, Marriott International, Inc. MAR and Choice Hotels International, Inc. CHH.
Marriott Vacations sports a Zacks Rank #1. VAC has a trailing four-quarter earnings surprise of 13.9%, on average. The stock has declined 6.4% in the past year.
The Zacks Consensus Estimate for VAC’s current financial year sales and earnings per share (EPS) indicates an increase of 19.7% and 131.4%, respectively, from the year-ago period’s reported levels.
Marriott carries a Zacks Rank #2. MAR has a trailing four-quarter earnings surprise of 18.6%, on average. The stock has increased 16% in the past year.
The Zacks Consensus Estimate for MAR’s current financial year sales and EPS indicates growth of 46.7% and 103.1%, respectively, from the year-ago period’s reported levels.
Choice Hotels carries a Zacks Rank #2. CHH has a trailing four-quarter earnings surprise of 11.2%, on average. The stock has declined 3.6% in the past year.
The Zacks Consensus Estimate for CHH’s current financial year sales and EPS indicates growth of 25.3% and 21.7%, respectively, from the year-ago period’s reported levels.
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