This Stock Won't Sink in a Recession

You can find the best investment ideas in the most unlikely of places. This company will make money as long as swimming pools remain in service in your neighborhood.

May 12, 2014 at 5:19PM

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Source: Pool Corporation

As the largest wholesale distributor of swimming pool and related backyard products in the U.S., Pool Corporation (NASDAQ:POOL) belongs to the minority of defensive recession-proof consumer stocks. It will make money as long as people continue to swim, and the results speak for themselves: Pool Corporation has delivered positive earnings and operating cash flow in every year for the past decade. It has also grown its revenues and earnings by decent 10-year compound annual growth rates of 6.1% and 6.7%, respectively.

Pool Corporation shares characteristics with other defensive stocks such as Rollins (NYSE:ROL) and Sysco (NYSE:SYY).

Non-discretionary spending supported by large installed base
Pool Corporation generates about 83% of its revenue from the U.S. pool market, of which more than half relates to non-discretionary spending with respect to replacement, refurbishment, and repair. While the demand for new swimming pools varies with the health of the housing market, activities related to the maintenance of existing swimming pools and the repair of damaged pools aren't affected by either the economy or changing consumer preferences.

For example, chemical disinfectants like chlorine keep swimming pools free of viruses and bacteria; filters and pumps serve similar purposes by sanitizing the pool water. Pool Corporation's customers risk legal liability and reputation damage if they reduce their repair and maintenance expenditures.

In addition, Pool Corporation benefits from the sale of consumables and follow-on products that pools need whenever someone installs them. The number of swimming pools in the U.S. has increased in every year for the past 14 years, as it has grown from approximately 4 million in 1999 to over 5.2 million in 2013. As more pools are added than removed from service, the growing installed base of swimming pools provides Pool Corporation with an annuity-like recurring revenue stream.

Rollins, the world's largest pest and termite control company, has a stellar financial track record comparable to that of Pool Corporation. Like Pool Corporation, Rollins has been profitable and free cash flow positive for the past 10 years. This is because Rollins' clients also view its services as non-discretionary.

Every company needs to keep its office spic and span so its premises remain conducive for its staff. For Rollins' clients in the food & beverage and hospitality industries, a pest-free environment minimizes the risks of end-customer complaints and even food poisoning. As for Rollins' residential customers, termites can seriously devalue their properties.

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Source: Pool Corporation

Strong bargaining power by virtue of scale
While it is already established that the swimming pool supplies business is very resilient, this doesn't automatically mean that Pool Corporation will earn profits, as both suppliers and customers have the potential to squeeze its profit margins. However, Pool Corporation captures most of the profit in the value chain, as it has strong bargaining power with both suppliers and customers.

Pool Corporation is the biggest wholesale distributor of swimming pool products, boasting a network of 229 sales centers. In contrast, the next largest 50 players have a combined total of about 200 sales centers, with more than half of them operating less than 10 centers.

Besides deriving significant economies of scale by spreading its fixed costs over a larger revenue base, Pool Corporation also has the upper hand in negotiating with a more fragmented base of customers (80,000 dealers) and suppliers (2,200 vendors).

Another company with tremendous bargaining power is leading food distributor Sysco. It has about 18% market share in a fragmented food-service industry. On top of that , it announced plans to merge with its biggest competitor US Foods in December last year.

If the acquisition goes through as planned, it should result in synergies of about $600 million for Sysco, of which a majority will likely come from the increased bargaining power of the new, enlarged company. Apart from scale-based advantages, Sysco has also put in efforts to build up its private-label portfolio to about half of the products it sells. This gives Sysco the flexibility to substitute third-party branded products with its own in-house brands if its suppliers come down hard on price.

Foolish final thoughts
A successful company is nothing more than one which keeps its customers coming back and which doesn't have to give up a large chunk of its profits to more powerful suppliers. One such company is Pool Corporation. Furthermore, Pool Corporation is shareholder-friendly, as it has repurchased more than $600 million worth of its shares in the past decade and paid out dividends in every year during the same period.

Get out of the living room and into the swimming pool
If you swim regularly like most people, Pool Corporation is making a lot of monies from your exercise habits. You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Sysco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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