Updated: Mar 4
Pool Corp is the world's largest wholesale pool products distributor, with business lines of maintenance, installations and irrigation products in the United States, Europe and Australia. Pool installations across the US have been steadily rising throughout the years, and the coronavirus pandemic has driven many people to improve their home living arrangements and splash out on a pool to keep the family entertained. Whilst the purchase of a pool is very discretional, and not something that can be afforded when consumers are keeping an eye on spending, once a customer purchases a pool, they become a recurring revenue stream for pool maintenance and parts providers. As explained by the Pool Corp CEO, once a pool is installed, it is necessary to move the water, treat the water with chemicals and filter the water, unless you want a pool of green algae at the bottom of your garden. Pool equipment suppliers were deemed ‘essential services’ in the US during the height of the pandemic, further increasing Pool Corp's ability to navigate uncharted waters. The number of in-ground swimming pools in the USA currently sits at around 5.2 million, something that Pool Corp states is in its infancy. With a population of 330 million and around 140 million homes, I am inclined to agree. Favourable trends such as the increased emphasis on health and wellness and long-term growth in housing units in southern states with more favourable weather are likely to increase the number of people desiring a pool at home.
As a business, 85% of Pool’s revenue is derived from its North America Pool segment, a small international presence and an irrigation and landscaping products business. Focusing on the core business, 50% of revenue is derived from pool maintenance product sales (chemicals, filters etc.), 20% is from renovations (grout, lining etc.) and 15% is from new installations (tiles, pumps etc.). Pool Corp operates 373 sales centres across the United States, Europe and Australia offering wholesale products to clients. The industry is highly fragmented, with many small operators, and this is where Pool Corp’s scale can deliver commercial agreements with suppliers, leading to lower costs for customers. With maintenance and minor repair combined, Pool estimates over 60% of revenue comes from a recurring source, which is particularly useful when discretionary spend reduces, and less contribution can be derived from installation product sales.
Pool Corp’s net sales were up 23% in 2020, with an explosive 44% growth in Q4. This is an unprecedented level of demand, which rode off the back of strong stay at home trends and a bout of very good weather in 2020. Whilst the stay at home trends may persist for a while longer, this level of demand is unlikely to persist for the long term. However, as we have already outlined, pool installations are just the start of the customer lifecycle with Pool Corp; every new installation creates a new customer, and the increase in 2020 installations will likely provide a tailwind of recurring revenue for Pool in the years to come.
Looking into the financials of Pool, one can see it is a very high-quality business. It has seen steady growth in revenue, with 2020 an outlier in terms of positive performance. Operating profit has increased in step with revenue, and whilst operating margin is below the norm for typical quality companies, it can be justified in the nature of Pool Corp’s business as a wholesaler. That being said, the margin is steadily improving, and in terms of its peers, Pool Corp is way above your typical wholesale company (for instance, Costco Wholesale’s operating margin is 3%). A key metric that highlights Pool Corp’s financial quality would be its Return On Capital Employed (ROCE) figures — averaging 34% over the last 4 years, with relative consistency, the ROCE is testament to Pool Corp’s capital allocation and astute financial practices. With little in terms of leverage, the overall financial picture at Pool Corp is very solid.
In terms of valuation, Pool is trading at roughly 35 times 2021 estimated earnings; a few turns higher than the S&P500, but arguably a much better company operationally, financially and with much more favourable tailwinds than the average company in America. With a high return on capital, and track record of long term compound growth, I believe Pool Corp can continue to deliver for shareholders. If you are considering the purchase, I would recommend keeping an eye on housing growth in the United States and general consumer discretionary spending, but also bear in mind that much of Pool Corp’s revenue comes from a recurring source — even in the financial crisis of 2008/9, revenue dipped by just 20% from its high in 2007 to the low of 2009.
For disclosure, The Twenties Trader does not own shares in Pool Corp (but should).