POOL Stock Study (10-25-23)

Posted by Mark on January 31, 2024 at 06:52 | Last modified: October 25, 2023 11:34

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

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 past decade, 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 leads peer and industry averages while increasing from 7.6% (’13) to 15.9% (’22) with a last-5-year mean of 12.5%.

Also over the past decade, ROE leads peer and industry averages by increasing from 27.7% (’13) to 61.4% (’22) with a last-5-year mean of 62.1%. Debt-to-Capital is higher than peer and industry averages while ranging from 46.3% in ’13 to 74.9% in ’19 with a last-5-year mean of 60.3%.

Interest Coverage is 11.5 (Value Line) and Current Ratio 2.7 (M*). Value Line gives an “A” rating for Financial Strength.

With regard to sales growth:

• CNN Business projects contraction of 6.5% YOY and 0.8% per year for ’23 and ’22-’24 (based on 12 analysts).
• YF projects YOY 10.1% contraction and 4.0% growth for ’23 and ’24, respectively (11 analysts).
• Zacks projects YOY 10.1% contraction and 4.4% growth for ’23 and ’24, respectively (6).
• Value Line projects 5.3% annualized growth from ’22-’27.
• CFRA projects contraction of 9.8% YOY and 2.6% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 3.3% contraction per year.

My forecast of 2.0%/year discounts the available long-term estimate given the general agreement on shorter-term contraction.

With regard to EPS growth:

• CNN Business projects contraction of 19.2% YOY and 5.1% per year for ’23 and ’22-’24, respectively (based on 12 analysts), along with 5-year annualized contraction of 5.8%.
• MarketWatch projects annualized contraction of 12.6% and 4.9% for ’22-’24 and ’22-’25, respectively (12 analysts).
• Nasdaq.com projects annualized growth of 10.7% and 9.4% for ’23-’25 and ’23-’26 [7/5/1 analyst(s) for ’23/’25/’26].
• Seeking Alpha projects 4-year annualized contraction of 5.8%.
• YF projects YOY 28.7% contraction and 10.4% growth for ’23 and ’24, respectively (7), along with 5-year annualized contraction of 0.8%.
• Zacks projects YOY 27.5% contraction and 8.2% growth for ’23 and ’24, respectively (4), along with 5-year annualized growth of 5.9%.
• Value Line projects annualized growth of 1.4% from ’22-’27.
• CFRA projects contraction of 27.1% YOY and 9.8% per year for ’23 and ’22-’24 along with a 3-year CAGR of 1.0%.

My forecast of -2.0% per year is less than the long-term-estimate mean (-1.0% for five estimates). My initial value will be 2023 Q2 $15.09/share EPS rather than the 2022 EPS of $18.70. For low EPS, I will use a -4.0% growth rate (arbitrary). These result in high and low EPS of $13.64 and $12.30/share, respectively.

My Forecast High P/E is 28.0. Over the past decade, high P/E ranges from 26.5 in ’14 to 43.6 in ’20 with a last-5-year mean of 35.5. The last-5-year average P/E is 27.3. I am forecasting toward the bottom of the range (only ’14 is lower).

My Forecast Low P/E is 18.0. Over the past decade, low P/E goes from 20.9 in ’13 to 22.2 in ’19 before taking a nosedive to 14.9 in ’22. The last-5-year mean is 19.2. I am forecasting toward the bottom of the range [only ’22 and ’20 (17.9) are lower].

My Low Stock Price Forecast (LSPF) is $256.00. Sticking with default gives $221.40, which is 22.0% less than the 52-week low. My Forecast Low P/E is uncertain because I don’t know whether the first or last five years of the past decade will be more representative of the future. Nevertheless, I think the default is too extreme. My LSPF is 20.5% less than the previous close and 9.8% less than the 52-week low. I think that is sufficiently low even from a conservative standpoint.

Over the past decade, Payout Ratio ranges from 18.7% in ’21 to 35.6% in ’13 with a last-5-year mean of 25.6%. I am forecasting below the range at 18%.

These inputs land POOL in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 4.1%.

PAR (using Forecast Average—not High—P/E) of 0.3% is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead (still far below my target).

To assess MOS, I start by comparing my inputs with those of Member Sentiment (MS). Based on only 55 studies (my study and 14 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 8.8%, 7.9%, 27.3, 18.2, and 27.0%. I am lower on all but Forecast High P/E (28.0). Value Line’s projected average annual P/E of 24.0 is higher than MS (22.8) and mine (23.0).

MS high / low EPS are $23.98 / $15.09. My EPS range (see above) is lower. Value Line’s high EPS is $20.00.

MS LSPF of $260.30 implies a Forecast Low P/E of 17.2: less than the above-stated 18.2. MS LSPF is 5.2% less than the default $15.09/share * 18.2 = $274.64, which results in more conservative zoning. MS LSPF is still 1.7% greater than mine.

My TAR (over 15.0% preferred) is much less than the 15.6% from MS. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is 4.1 per Zacks: significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is cheap at 0.6. Kim Butcher’s “quick and dirty DCF” suggests the stock to be 15.3% undervalued: 21.0 * [$5.00 – ($6.00 + $0.90)] = $380.10/share.

POOL is a BUY under $287. With a forecast high price near $382, TAR should meet my 15% criterion around $191/share.

My investment outlook will improve dramatically if/when [most/all] analysts start seeing growth back on the horizon. Until then, it’s not a high-quality BI stock anyway.