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Pool Corp (POOL) Strategic Plans Bode Well: Should You Hold?

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Pool Corporation’s (POOL - Free Report) consistent focus on remodeling activities, including major pool refurbishment and replacement of key pool equipment, bode well for the company. Evidently, it registered a year-over-year gain in both top and bottom line over the past few quarters, courtesy of these strategic initiatives. In the past six months, the company’s shares have gained 20.8% compared with the industry’s increase of 9.5%. Yet, seasonality of its business and rising costs raises concern. Let’s delve deeper.

Key Catalyst

Pool’s market leading position offers a cost advantage, allowing it to generate higher return on investment than smaller companies. Further, the company’s leadership position provides the scope to further benefit from the flourishing housing market, which continues to boost the demand for Pool’s products. Although there are numerous competitors and low barriers to entry, the scale of operations offers cost advantages to the company, thus allowing it to build stronger customer relationships.

Meanwhile, the company remains focused on strategic expansion. It plans to foray in newer geographic locations, expand in existing markets and launch product categories that will boost its market share. Pool is also trying to expand through various acquisitions. To this end, the company completed six buyouts in the last year.

Furthermore, this Zacks Rank #3 (Hold) company generates a large portion of its earnings from the existing pools. While more than half of its gross profits are stemmed from products related to the maintenance and repair of pools, the remainder is derived from the construction and installation of new pools and landscaping. In fact, over the past five years, the pool industry has been showing signs of recovery, mostly supported by the gradual improvement in remodeling and replacement activity. Evidently, the company’s existing pool business witnessed revenue growth throughout 2015, 2016, and 2017, mainly aided by higher replacement activities. This trend is expected to prevail going forward.

In the first quarter, building materials maintained strong performance of 9% growth with 15% growth in the commercial category. In addition, pool equipment growth was 7%. The improvement in these product categories are expected to continue.


Of late, Pool has been facing increased expenses due to higher labor and delivery costs as well as investments in information technology systems and hardware. In the first quarter of 2018, cost of sales rose 6.9% from the prior-year quarter. Selling and administrative expenses increased 8.1% year over year. In fact, in order to achieve high margins, Pool must cut down the expenses.

A brief glance at some valuation metrics seems to indicate that Pool is currently overvalued compared to its industry.  The stock has a trailing 12-month P/E ratio of 33.63, which is below the high level of 37.54 scaled in a year. On the contrary, the trailing 12-month P/E ratio for the industry and the S&P 500 is 22.05 and 19.97, respectively.

Key Picks

Better-ranked stocks in the same space are Johnson Outdoors Inc. (JOUT - Free Report) , Malibu Boats, Inc. (MBUU - Free Report) and Callaway Golf Company (ELY - Free Report) . Johnson Outdoors and Malibu Boats sports a Zacks Rank #1 (Strong Buy), whereas Callaway Golf carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Johnson Outdoors has surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat of 602.1%.

Malibu Boats has impressive an impressive long-term earnings growth rate of 15%.

Callaway Golf has long-term earnings growth rate of 25%.

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