Pool Corp. (POOL 0.32%) has posted total returns just shy of 50,000% since its initial public offering (IPO) in 1995. This makes it a shining example of the Peter Lynch-style of real-world investments that can create generational wealth for investors who are willing to hold for decades.
Despite this incredible run, Pool's share price sits 40% below its all-time highs from 2021 and 18% below its 52-week highs as it reported three consecutive quarters with declining sales.
So, is Pool's long track record of stomping the stock market finally coming to an end? Or is this best-in-class operator facing a temporarily challenging macroeconomic environment? Here's why I'm thinking the latter.
The No. 1 distributor of pool equipment worldwide
The largest distributor of swimming pool equipment and related accessories, Pool is home to 430 sales centers across 41 U.S. states and 12 countries. Selling over 200,000 products, Pool serves roughly 125,000 professional contractors, as well as individual homeowners, through its Pinch A Penny Pool Patio Spa franchise stores.
The company sells products through three primary categories across its market-leading network:
- Do-it-yourself (DIY) retail and maintenance service (61% of sales): Non-discretionary items such as chemicals, cleaners, pumps, test kits, and filters.
- Renovation and remodeling (22% of sales): Semi-discretionary items like tile, coping (the decorative border around pools), decking, landscaping, water features, and LED lighting.
- New pool construction (17% of sales): Construction-related equipment and products.
These product categories are crucial to investors because Pool generates roughly 83% of its revenue from non- and semi-discretionary purchases. In layman's terms, most of the company's sales are recurring and must be bought at the risk of the pool becoming unusable over time.
Thanks to the continued necessity of repurchasing these products, Pool isn't overly reliant upon new home construction booms to survive. On top of that, the company's DIY, maintenance, renovation, and remodeling sales continue to grow over time as each incremental pool constructed gives it another customer to continue serving.
Things aren't as bad as they seem
You might be thinking, "If Pool's revenue sources are so resilient, why is its stock down 40% from all-time highs amid this challenging macroeconomic environment for anything housing-related?"
And that's a perfectly fair question. With sales declining 9% in its most recent quarter (on top of a 15% drop in the two quarters before), it may seem like the company is far less durable than advertised. However, looking at its earnings suggests this isn't such a disaster.
So far in 2023, Pool's non-discretionary product category remained stable as its vertically integrated chemical line saw a 5% sales increase, and its commercial sales grew by a similar 10% in the last quarter, for example. Meanwhile, most of the company's sales decrease came from renovation and remodeling, declining by 10% to 15%, and new pool construction, which plunged 30% as interest rates rose and consumer confidence remained weak.
This cyclicality from Pool's two smaller product categories can't be avoided due to its close ties to the housing industry. However, long-term-minded investors can take advantage of this cyclicality. With a U.S. housing market that is still vastly undersupplied when looking a decade out or more, Pool's stock being down 40% could represent an incredible opportunity.
A once-in-a-decade valuation
Most importantly for investors, however, is that Pool isn't just down 40% -- it's arguably at its best valuation in a decade.
POOL Free Cash Flow Yield data by YCharts
Pool's current valuation is undeniably attractive, with free-cash-flow and earnings yields higher than their 10-year averages. Due to the nature of its business and its large working capital fluctuations, its actual yield probably lies between these 6.4% and 4% figures -- let's say 5%, to be safe. This is far above where the company has traded for most of the last decade.
Tremendous cash returns to shareholders
And if my excitement over this cheap valuation doesn't strike your fancy, maybe the fact that management sees its shares as very appealing will. Management has indicated that it is happy to buy back its shares at these discounted prices, buying back around 1% of its total shares outstanding in its last quarter alone. And this is nothing new.
With a long history of consistently buying back shares over time, Pool has lowered its total outstanding shares by 15% over the last decade.
Best yet for investors, the company isn't just a one-trick pony when returning cash to shareholders. Sporting 13 years of consecutive increases, Pool dividends have grown over 1,300% since the company began making payments. Despite this incredible growth, Pool maintains a low payout ratio of only 30%, meaning it still has ample room to continue raising its dividend far into the future -- maybe one day becoming a Dividend King.
While Pool will require prospective investors to be patient due to the turbulence in the housing market, its leadership position, once-in-a-decade valuation, and hardy cash returns to shareholders make it a magnificent business to buy and hold forever.
