The problem with Pool Corp. (POOL 0.64%) is really an issue of perspective. What's most important to potential investors: Near-term performance or long-term opportunity?
Those that think short-term are likely avoiding the stock or selling because earnings results are likely to be rough this year. Long-term investors will hopefully see the underlying demand that was created the past couple of years and act accordingly.
Do you know what it takes to own a pool?
When someone decides they want a pool there are basically three pieces to consider. The first is the construction of that pool. The second is the maintenance of the pool, where weather and seasonality are big factors. And the third is the need, at some point, to fix the pool or renovate it. Pool's operations are set up to help customers with all three. And its operations were designed around a natural cycle of sales and servicing, like every other company in this industry.
Image source: Getty Images.
The problem is that the coronavirus pandemic upended that natural cycle. More people working from home and practicing social distancing created an increased demand to enhance their living experience. One way to do that was to build a pool, which led to a spike in pool construction. But as pandemic concerns eased and the world got back to a more normal state, the demand for new pools slowed and a glut of already built pools hurt the business.
When you add in unusual wet and cold weather in key Pool Corp markets early this year (notably California and Arizona), you get some tough first-quarter 2023 results. Even worse, the company lowered its full-year 2023 EPS guidance from a range of $16.03 per share to $17.03 to a range of $14.62 to $16.12. If that weren't bad enough, the company earned $18.70 per share in 2022. In other words, 2023 was already expected to see an earnings decline and now it is going to be even worse.
You can see why some investors might be downbeat about the stock.
The long-term view still looks like a pool party
Here's the interesting thing. Once a person buys a pool, that pool needs to be maintained. If it breaks, it needs to be fixed. While the new pools added during the pandemic may have drawn forward some demand from the future, all of those new pools still add to the overall customer base that Pool serves. Notably, the company highlighted that first-quarter 2023 revenue of $1.2 billion represented the third consecutive year in which first-quarter sales topped $1 billion. That's an indication that the customer base has grown.
During the company's Q1 conference call, CEO Peter Arvan made sure to highlight that only 15% of Pool's business is tied to the construction of new pools. The rest comes from maintenance (60%) and renovation (25%). To give an idea of what's going on, management estimates that new pool construction was down 25% year over year in the first quarter while renovation sales were only off by 3%. In other words, the big change was the new pool demand bubble from the pandemic falling back to more normal levels.
Yes, the maintenance piece of the pie is more affected by weather, there's not in Pool's control. Nobody wants to swim in cold or rainy weather. But each new pool that was added during the pandemic adds to the long-term demand for Pool's maintenance and renovation operations. That's why it is so important that first-quarter revenue has now topped $1 billion for three years running.
Pool is not slowing down
The underlying growth in demand is also why Pool can continue to expand its geographic reach. It currently expects to open 10 new company-owned stores in 2023 with another 10 or so in its franchise business. That, too, helps to build the company's revenue stream over the long haul. So even though 2023 is likely to be a rough earnings year compared to 2022, long-term investors should pay more attention to the underlying demand trends and focus much less on the near-term financial impact of new construction trends.
This near-term drawdown could end up being a solid buying opportunity for investors that think in decades and not days.
