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Pool Rides on Solid Base Business, Seasonality Remains a Woe

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On Aug 25, we issued an updated research report on swimming pool and lifestyle product maker, Pool Corporation (POOL - Free Report) .

The company’s shares have gained 1.7% in the last year, outperforming the industry’s decline of 2.9%. Notably, Pool’s earnings beat/met the Zacks Consensus Estimate in 11 of the trailing 12 quarters, with an average positive surprise of 6.32% in the last four quarters.

Going forward, the company’s operational advantages, given its market share and scale, along with the solid base business should aid the stock in maintaining its solid performance.

Growth Drivers

Pool generates more than half of its gross profits from products related to the maintenance and repair of pools, while the remainder is derived from the construction as well as installation of new pools and landscaping. In fact, maintenance and upkeep of pools ensure a steady revenue stream for the company even during economic downturns.

Notably, above-average temperatures across Pool’s geographic footprint play a key role in bolstering its base business sales by extending the selling season. In 2016, above-average temperatures had nearly 1% positive impact on the overall base business sales and roughly a 5-cent impact on its EPS. The trend is expected to continue through 2017.

Evidently, in second-quarter 2017, the Base business segment witnessed sales growth of 7% year over year on the back of increases in swimming pool repair and remodel activities, including major pool refurbishment and replacement of key pool equipment.

Meanwhile, stronger consumer discretionary spending as evident from the increase in sales of pool construction materials and ancillary equipment and supplies, with consumers investing in enhancing their outdoor living spaces, and a tight supply situation indicate robust demand in 2017.

Overall trends continue to benefit from steady gains in consumer-discretionary spending as homeowners increasingly look to remodel and replace older pools, and migrate to higher-end products.

In fact, indicators for new pool construction also remain favorable with increasing numbers of millennials purchasing homes, rising home values and single-family homeowner equity, and expectations for reduced banking regulations, leading to increased capital available to homeowners. Going forward, all of these are anticipated to drive continued growth in new pool construction.

Furthermore, the scale of operations offers cost advantages to the company allowing it to build stronger relationships with customers. Thus, we believe Pool will continue to capture market share from regional pool and irrigation distributors, given its economies of scale, which drives higher rebates, better sourcing, IT resources, and product availability.

Consequently, the company’s plans to penetrate newer geographic locations, expand in existing markets and launch new product categories are expected to further boost its market share. In fact, Pool has expressed intentions of entering into the outdoor living segment that includes complementary items, which can accompany pool-related products.

Some Concerns

Pool’s business is susceptible to adverse changes in weather such as unseasonal rainfall and below-average temperatures, which put pressure on the top line.

Markedly, though the company has branch locations nationwide, roughly 50% of its branches and sales are in California, Florida, Texas, and Arizona. This, in turn, reflects a high degree of concentration and dependence on these areas, and their weather conditions.

Meanwhile, Pool has been facing increased expenses, lately, due to higher labor and delivery costs as well as investments in information technology systems and hardware. This is likely to put pressure on margins in the near term.

Moreover, the company’s international presence raises some concerns in the form of unfavorable political and regulatory conditions in the market where it functions, and negative currency translations.

Zacks Rank & Stocks to Consider

Pool currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in this sector include Johnson Outdoors Inc. (JOUT - Free Report) , Malibu Boats, Inc. (MBUU - Free Report) and Callaway Golf Company (ELY - Free Report) . While Johnson Outdoors and Malibu Boats sport a Zacks Rank #1 (Strong Buy), Callaway Golf carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Johnson Outdoors’ fiscal 2017 earnings moved up 23.2%, over the past 60 days. Further, for fiscal 2017, EPS (earnings per share) is expected to increase a solid 100%.

Malibu Boats’ earnings surpassed/met the Zacks Consensus Estimate in the last four quarters with an average beat of 7.56%. For fiscal 2017, EPS is expected to grow 16.7%.

The Zacks Consensus Estimate for Callaway Golf’s 2017 earnings climbed 19.4% over the last 60 days. Moreover, the trailing four-quarter average earnings surprise is a positive 23.29%.

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