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We recently upgraded our rating on Pool Corp. (POOL - Analyst Report) from Neutral to Outperform. The new rating is supported by better-than-expected first quarter results, seasonality of demand and the return of green business.

In the first quarter, Pool reported adjusted loss of one penny per share, which narrowed from a loss of 12 cents in year-earlier quarter and surpassed the Zacks Consensus Estimate of 8 cents loss per share. Quarterly revenues of $312.9 million also handily surpassed the Zacks Consensus Estimate of $287.0 million and registered a 16% year-over-year growth.

Pool Corp.'s business is susceptible to changes in weather. While abnormally hot and dry conditions are generally favorable for the company's operations, abnormally cool or rainy weather patterns can adversely affect sales.

Normally, sales are benefited by weather conditions in the second and third quarters of a calendar year. Since Pool is presently operating in its second quarter, revenue will likely see a robust sequential growth at the end of this period.

Further, the green business, which suffered for long, turned around in the first quarter of 2011 with a year-over-year growth rate of 12%. In fact, the green business scored positive results for the first time since the economic downturn.

Management expects more modest revenue growth for the remainder of 2011 given the benefits in the first quarter driven by weather and easy comparison. Management also continues to expect gross margin improvement throughout 2011, albeit at a more modest rate. Management also believes that with reasonable recovery in the macroeconomic environment, earnings per share will grow at a 20% rate per year for the next five years.

Additionally, Pool Corp. has a dominant position with respect to market share. The company is the only truly national wholesale distributor focused on the swimming pool industry in the U.S. It controls approximately one-third of the pure-pool domestic market share sold through distribution.

Over the last 30 days, 7 out of 10 analysts raised their estimates for the second quarter while only 1 analyst went in the opposite direction. The magnitude of estimate revisions also went up 2 cents to $1.15 over the same time span. 

Based on the company’s fundamentals, we expect the stock to fetch above-market returns and hence upgrade the stock from Neutral to Outperform. Pool currently retains a Zacks #1 Rank, which translates into a short-term Strong-Buy rating.

The company’s competitors include Arctic Cat Inc. (ACAT - Snapshot Report) and Johnson Outdoors Inc. .

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