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Pool Corp (POOL) Gains From Base Business Amid High Expenses

Zacks Equity Research

Pool Corporation POOL gains from a market-leading position that offers it a cost advantage and allows it to generate higher return on investment than smaller companies. The company’s relentless expansion strategies and a robust base business help it gain higher revenues.However, increased expenses and extreme weather conditions remain potential headwinds.

Nevertheless, backed by strong demand and brand position, shares of Pool Corp have gained 29% so far this year, outperforming the industry’s 17.3% rally.




 

Let us delve into factors that suggest that investors should hold on to the stock for the time being.

Expansion Efforts & Robust Base Business Encourage

Pool Corp is focused on expansion to drive revenues. It is foraying in newer geographic locations, expanding in existing markets and launching innovative product categories that will boost its market share. To this end, the company is also trying to expand through various acquisitions. It completed six acquisitions in the last year. And so far this year, it has added five facilities.

We believe that Pool Corp will continue to capture market share from regional pool and irrigation distributors, given its economies of scale, which drive higher rebates, better sourcing, IT resources and product availability. Additionally, there are opportunities to acquire share from other distributors that are not pool-focused.

Meanwhile, the company generates the majority of revenues from the base business, which excludes sales centers that are acquired, closed or opened in new markets for a period of 15 months. In 2018, its base business segment constituted 99% of total revenues. Pool Corp’s sincere efforts to boost the base business are reflected in the high demand in its end markets. In the first quarter of 2019, overall sales were favored by 1% growth in the base business.

Turning to green business despite weather challenges, Pool Corp saw base revenue growth of 5% in the first quarter. Overall gross profit and operating margins also improved substantially, given the improvement in the company’s base business.

Concerns

Pool Corp has been facing increased expenses lately. Higher labor and delivery costs as well as investments in information technology systems and hardware are leading to higher expenses. In the first quarter of 2019, cost of sales increased 0.4% from the prior-year quarter. Selling and administrative expenses increased 2.8% year over year. Also, total operating expenses in the quarter rose 2.8% year over year. In fact, we believe that in order to achieve high margins, the company has to work hard toward cutting expenses.

Meanwhile, its business is susceptible to weather changes. Normally, sales are favored by weather conditions in the second and third quarters of a calendar year while unseasonably warm conditions in spring or early winters affect sales. Meanwhile, roughly 50% of the company’s branches and sales are in California, Florida, Texas and Arizona. This reflects a high degree of concentration and dependence on these areas and their weather conditions. Resultantly, the intermittent hurricanes in Florida and Texas along with natural disasters in other places affect its earnings and sales.

Zacks Rank & Stocks to Consider

Pool Corp currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks from the leisure space are Malibu Boats MBUU, MasterCraft Boat MCFT and Lindblad Expeditions LIND, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Malibu Boats, MasterCraft Boat’s long-term EPS growth rates are 10% each. Lindblad has a VGM Score of B.

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