Pool Corp Report
How does POOL make money? How does it generate revenue and what are the key costs?
POOL makes money as the world’s largest wholesale distributor of pool and outdoor living products. These address the full life-cycle of a pool, from installation (20% of sales) to maintenance (60%) and renovation (20%). The US accounts for 90% of sales.
POOL generates revenue through 420 sales centers (December 2022), mainly in North America, where it distributes 200k branded and private label products, to 125k customers.
COGS relate predominately to chemicals and fertilizer. Although not immune to inflation, POOL is protected, to an extent, as its monopolistic local positions allow it to pass through price increases, helped by the fragmented nature of its client base (no customer is > 10% of sales.) Gross margin actually improved from 30.5% in 2021 to 31.3% in 2022. Tariffs have risen on ‘certain imported chemicals’. This relates to chlorine, which is mainly sourced from China and was hit by Trump duties.
Is POOL a good or bad company? Why?
A key metric for company strength is ROIC. In its 2022 NASDAQ presentation the company used an ‘adjusted’ figure of 43.9% (v. 10% on average for US companies). I used EBITDA/ net operating assets (including goodwill, given POOL’s acquisitive growth) and still arrived with a credible figure of 37.2%.
Balance sheet is also ‘good’, with EBITDA being 20 x interest expense - a good margin for future M&A. The Walmart of the pool business!
However, cash conversion is ‘bad’ as net profits at year end 2022 are 748m and FCF is only 432m (perhaps due to forward looking inventory build.)
Please explain how you would calculate POOL’s TAM. What do is their greatest area of potential growth?
POOL’s TAM relates to:
it's achievable US market share: Take the 60% share around its 420 centers and extrapolate that into areas where it is under represented.
Selectively add to ‘international’, particularly in concentrated regions of dense, affluent pool ownership, like Ibiza.
Finally, the best growth maybe realized expanding into under-penetrated, adjacent niches, particularly upgrading an aging installed base with little automation.
POOL has provided a long-term revenue growth algorithm of 6%-9%. In the event of a housing downturn, what components of the algorithm do you expect to be most at risk? Could POOL see a revenue decline in a housing downturn?
The company recently had a revenue CAGR of 15%, but this includes M&A and can’t be assumed continuously.
Excluding COVID, underlying organic growth has been +5% to +9% aided by low i-rates that can’t be assumed to continue either – unless a bank run encourages a Fed pivot.
In combination, this could represent downward growth pressure. There was after all a fall in ‘pools added’ in the US between 2005 (200k) and 2009 (50k). However, only 20% of POOL’s sales are affected. The important figure is the 60% that relates to ‘non-discretionary maintenance’. In a recession, people won’t buy a washing machine but they will still buy ‘Tide’. Therefore, growth is underpinned by the base of US pools (5.35m v. 200k of annual new construction). POOL, like Apple, simply isn’t cyclical.
In conclusion, fewer new-builds, deferred upgrades and maintenance contracts switching to DIY could lead to revenue growth falls in 2023, before another boom, as POOL buys distressed local competitors. Market share gains will ensure the algorithm is right over the medium term, but looks too optimistic in the shorter term.