Shares of Pool Corporation (POOL 0.64%) are down 40% from their 52-week high as a result of broader market weakness and because of a cooling housing market. This sell-off looks like an attractive entry point for a high-quality, blue-chip growth stock that has created tremendous returns for investors over the years.
Its shares have returned over 39,000% for shareholders since the company went public in 1995. Even over a smaller 20-year time horizon, Pool Corp. has returned 6,000%. With a strong track record of creating shareholder value and an attractive entry point, it's a good time to take a look at Pool Corp.
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The big misconception
The aptly named Pool Corp. is the world's leading distributor of pool-related outdoor-living products. While shares have suffered because the company is perceived as being tied to the housing market, much of this fear is misplaced. About 20% of Pool Corp.'s business is in the construction of new pools, but the vast majority, 60%, is tied to the more-boring but consistent business of pool maintenance. The final 20% of revenue is from renovating and remodeling existing pools.
Homeowners who already have a pool need to continually maintain it and -- because it is a significant investment and actively used -- are unlikely to let it fall into disrepair. This large and growing installed base of existing pools helps Pool Corp. to drive consistent and recurring revenue. With a large increase in the number of new pools since the pandemic, this sets up the company for years of increased maintenance revenue.
Furthermore, the Louisiana-based company sees plenty of ways to add value to new or existing pools as new technologies and innovation gain traction. For example, it is seeing a significant increase in demand for products like LED lighting, heaters and heat pumps, robotic pool cleaners, and automation controls. These add-ons all help to add to the total revenue for Pool Corp.
Significant scale
I often like to look for companies that have significant scale in fragmented markets as this gives them many advantages such as more reach, more operating leverage, and lower costs. Few companies can compare with Pool Corp. in this regard -- the company is significantly larger than any public or private competitor in this highly fragmented market.
Pool Corp. has 400 sales centers in 12 countries, over 2,000 sales and customer service representatives, 120,000 retail and contractor customers, and an unparalleled 200,000 products across its channels.
Reasonable valuation for this track record
While Pool Corp.'s valuation of 18 times earnings doesn't necessarily jump off the page at you as alarmingly cheap, it is a reasonable valuation for a company that has such a strong track record of creating shareholder value over the years. It grew revenue at a 15% compound annual rate over the last six years.
The company also pays a dividend, albeit a small one, which currently yields just over 1%. Pool Corp. just increased this dividend by 25%. And it is returning capital to shareholders by buying back shares. It just added almost $200 million to its share repurchase authorization, bringing the total authorization up to $600 million, which comes out to about 4% of the company's market cap.
Neither of these are eye-popping in and of themselves, but it is good to see the company slowly but surely increasing returns to shareholders, and it all adds to an investor's total return over the long term.
Should investors test the waters?
While Pool Corp. might not be the splashiest stock on the market, a good investment doesn't always need to be; it is a high-quality company with a strong track record of earnings growth that does not usually trade this cheaply.
Pool Corp. looks like it is in the sweet spot of both growth and value. Given the 40% decline in price -- which seems like an overreaction since most of the company's revenue is tied to pool maintenance -- and the growing base of pools that the company can maintain, this looks like the type of buying opportunity that long-term investors can wade into now and feel great about the decision five to 10 years from now.
