The swimming pool products distributor is enduring a challenging 2024, but it’s still a good-quality business likely to grow in the future.
Wholesale swimming products distributor Pool Corp.‘s (POOL -0.14%) shares declined by 22.9% in the first half of 2024, according to data provided by S&P Global Market Intelligence.
Moreover, the stock declined 9% after the company updated the market on the swimming pool season and promptly said new pool construction activity in 2024 could be down 15% to 20%. In addition, management now believes remodeling activity could decline by as much as 15% in 2024 — a downgrade in expectations compared to a previous estimate for flat growth to a decline of 10%.
While Pool Corp.’s maintenance-related products have held up quite well — equipment sales were down just 2% in the first half — its revenue from products related to discretionary spending is down significantly. In a nutshell, homeowners are seeing challenging housing market conditions and are holding off on “spending on big ticket items like swimming pools and outdoor living projects,” according to the update.
Greedy when others are fearful?
The market has already anticipated weak consumer spending on housing-related discretionary items for 2024, and as long as the Federal Reserve’s expected interest rate cut is delayed, this scenario is likely to persist.
However, it’s fascinating that the stock has recovered from the post-update sell-off and is now trading at a similar level to before the disappointing update on June 24. That likely reflects the sentiment that there’s nothing fundamentally wrong with Pool Corp.’s business, and a lower interest rate environment will send its discretionary-related sales growth back into positive territory. In addition, the installed base of swimming pools is still growing, and that should support maintenance product sales over the long term.
As such, investors are taking advantage of the dip to acquire shares in a company with excellent long-term growth prospects.
Image source: Getty Images.
A stock to buy?
Management downgraded its full-year earnings expectations to $11.04-$11.44 from a previous estimate of $13.19 to $14.19. The midpoint of the updated guidance puts Pool Corp. on a full-year price-to-earnings multiple of about 30 times earnings. Notwithstanding that, this is a valuation based on what’s likely to be a yearly trough in its earnings; I can’t help thinking that the valuation is still rich for a company that could disappoint again this summer.
So, while Pool Corp. is a good-quality company, its current valuation is not likely one at which many investors would feel comfortable buying in.
Lee Samaha has 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.