POOL Stock Study (5-2-23)

I recently did a stock study on Pool Corp. (POOL) with a closing price of $346.78.

CFRA writes:

     > Pool Corp. is one of the world’s largest wholesale distributors of
     > swimming pool and related backyard products. It is also one of the
     > top three distributors of irrigation and related products in the U.S.
     > POOL offers a comprehensive selection of services and products
     > including: 1) pool maintenance, which includes supplies, repair
     > parts and chemicals; 2) pool construction and renovation, which
     > includes pool tile, control systems, lighting, pool pumps, filters,
     > heaters, cleaners, among others; 3) commercial and residential
     > irrigation and landscape equipment and maintenance; 4) outdoor
     > living, which includes grills, lighting, and hardscape products.
     > Customers primarily include swimming pool remodelers and builders;
     > specialty retailers that sell swimming pool supplies; swimming pool
     > repair and service businesses; irrigation construction and landscape
     > maintenance contractors; and commercial customers who service
     > large commercial installations such as hotels, universities, and
     > community recreational facilities.

Over the last 10 years, this medium-size company has grown sales and earnings at annualized rates of 12.3% and 28.0% per year, respectively. Lines are up, mostly straight, and narrowing. PTPM increased from 7.6% in ’13 to 15.9% in ’22 with a last-5-year average of 12.5%. This is about even with peer averages and slightly higher than the industry.

ROE increased from 27.7% in ’13 to 61.3% in ’22 with a last-5-year average of 62.1%. This is an eye-popping number and well above peer and industry averages. Debt-to-Capital increased from 46.3% in ’13 to 74.9% in ’19 before cooling to 57.3% in ’22 for a last-5-year average of 60.3%. In case debt is a concern, Interest Coverage is 25 with Current Ratio a solid 2.4 per M*. Value Line says the former is 104 and gives the company an A rating for Financial Strength.

I forecast long-term annualized sales growth of 3% based on the following:

• CNN Business projects contraction of 18.1% YOY and 4.4% per year for ’23 and ’22-’24 (based on 10 analysts).
• YF projects YOY 5.5% contraction and 4.9% growth for ’23 and ’24, respectively (11 analysts).
• Zacks projects YOY 6.7% contraction and 5.5% growth for ’23 and ’24, respectively (6).
• Value Line projects 6.6% annualized growth from ’22-’27.
• CFRA projects 0.3% YOY growth and 2.6% growth per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 1.6% contraction per year.

I am forecasting conservatively by cutting the one available long-term estimate in half.

I forecast long-term annualized EPS growth of 1% based on the following:

• CNN Business projects 6.5% YOY contraction and 0.8% contraction per year for ’23 and ’22-’24, respectively (based on 10 analysts), along with 5-year annualized growth of 1.6%.
• MarketWatch projects 5.1% contraction per year and 0.4% growth per year for ’22-’24 and ’22-’25 (12 analysts).
• Nasdaq.com projects 11.1% YOY growth and 11.7% growth per year for ’24 and ’23-’25, respectively (7, 8, and 3 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 1.6%.
• YF projects YOY 19.5% contraction and 13.5% growth for ’23 and ’24, respectively (9), along with 5-year annualized growth of 4.2%.
• Zacks projects YOY 16.9% contraction and 9.7% growth for ’23 and ’24, respectively (8), along with 5-year annualized growth of 5.9%.
• Value Line projects annualized growth of 5.1% from ’22-’27.
• CFRA projects contraction of 18.3% YOY and 6.7% per year for ’23 and ’22-’24, respectively, in addition to 3-year projected CAGR of 6% [that I cannot reconcile with the EPS table].

I am forecasting below the entire long-term-estimate range (mean of five: 3.7%). Furthermore, I am projecting from the 2023 Q1 $16.81/share EPS rather than the 2022 EPS of $18.70.

My Forecast High P/E is 28. Over the last 10 years, high P/E has ranged from 26.5 in ’14 to 31.3 in ’18. This excludes ’19-’21 when high P/E made excursions to 35.7, 43.6, and 36.5, respectively. With a slowdown expected ahead, my forecast is lower than all values but ’14.

My Forecast Low P/E is 14. Over the last 10 years, low P/E went from 20.9 in ’14 to 22.2 in ’19 before heading lower to 14.9 in ’22. The last-5-year average is 19.2. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) is the default value of $235.30, which assumes zero growth from the 2023 Q1 EPS of $16.81/share. This is 32.1% less than the previous close and 15.4% less than the 52-week low.

Over the last 10 years, Payout Ratio has ranged from 18.7% in ’21 to 35.6% in ’13 with a last-5-year average of 25.6%. I am forecasting conservatively at 19%.

These inputs land POOL in the HOLD zone with an U/D ratio of 1.2. The Total Annualized Return (TAR) is 7.8%.

PAR (using Forecast Average—not High—P/E) is 2.0%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 71 studies done in the past 90 days (25 outliers and my study excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 9.6%, 9.5%, 30.0, 18.8, and 27.6%. I am lower across the board. Value Line projects a future average annual P/E of 24.0, which is lower than MS (24.4) and higher than mine (21.0).

With regard to other data, MS high and low EPS are $28.76/share and $18.80/share compared to my $17.67 and $16.81. My high EPS is lower due to a lower forecast growth rate and my low EPS uses the most recent quarter of [lower] growth. The MS LSPF of $265.70 implies a Forecast Low P/E of 14.1, is much less than the $18.80 * 18.8 = $353.44 default value, and is 12.9% higher than mine. MOS seems robust in the current study.

I would look to re-evaluate the stock under $300/share.