This pool-supplies distributor has made fortunes for long-term investors. A recent pullback may be an opportune time to get in on this compounder.
Have you recently come across a windfall of money, moved on from some losing stocks, booked profits on a big winner, or simply set some money aside from your paycheck and are looking for ways to deploy new capital? Then this article is for you.
Here’s one stock idea to consider as you enter the new year. While no stock is without risk, this company is a time-tested, high-quality operator that has performed exceptionally well over the long haul. In addition, it pays a reasonable dividend, is repurchasing its shares, and looks like an attractive investment today.
The stock is none other than swimming-pool supplier Pool Corporation (POOL 1.09%). Due primarily to the Federal Reserve’s economic tightening measures throughout most of 2023 and 2024, the company’s growth turned to declines in recent years, and shares have had a rough few years. The stock looks compelling at its current valuation — a rare find in a frothy market like the one we’re in today.
Let’s take a closer look at what makes this idea worth further consideration and research and, potentially, an investment.
Why Pool Corporation shares are down this year
On the surface, Pool Corporation’s recent quarterly results may scare some prospective investors away. Third-quarter sales declined 3% year over year. But a more proper analysis of this stock requires looking into what’s going on underneath the surface.
The issue weighing on results has been a higher-interest-rate environment’s impact on the construction and remodel supplies portion of the company’s business. While its commercial construction and remodel business is holding up well, along with demand for luxury residential projects, weakness remains pronounced in lower-budget residential projects. This is because these customers are typically more price-sensitive to interest rates’ impact on the monthly payments for financed projects.
A silver lining
Investors should realize that supplies going to new construction only go to about 14% of its end customers, and approximately 24% of sales go to renovation and remodeling. The bulk of end customers (about 62%) buy from Pool Corporation for maintenance purposes, where interest rates have little sway on sales trends.
To this end, for the full year of 2024, the company has guided for sales related to new construction units to be down 15% to 20%. In its third-quarter presentation, management said sales related to renovations and remodeling are expected to decline as much as 15%, and maintenance sales are expected to show flat or “slight growth” for the year.
In addition, Pool Corporation’s management explained in its third-quarter earnings call that it has been “encouraged by several economic factors such as stable home values, record home equity levels, continuing Sunbelt migration, … a resilient consumer, and gradual interest rate easing.”
A prudent capital allocator
A discussion of Pool wouldn’t be complete without an overview of management’s solid execution when it comes to allocating capital to pay down debt, repurchase stock, and pay dividends. Thanks to the business’ ability to generate a steady stream of meaningful cash, Pool Corporation has been able to reduce its debt from over $1 billion last year to $924 million at the end of the third quarter of 2024. Better yet, the pool-supplier specialist has been able to do this while repurchasing $159 million of shares in the first three quarters of the year, pay a regular quarterly dividend (Pool Corporation has a dividend yield of about 1.4% today), and increase its borrowing capacity from its credit facility by $50 million to $800 million.
The company’s shareholder-friendly capital return program is the icing on the cake that makes this stock worth recommending as a good potential investment idea.
As you enter the new year, don’t forget to give Pool Corporation a closer look to see if making it a small position in your portfolio makes sense for you. This stock could easily justify its price-to-earnings multiple of less than 30 times earnings in the coming years — especially if interest rates come down from current levels, as they’re widely expected to.
Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
