Few stocks were as refreshing as Pool Corp.’s during the Covid-19 pandemic.
Low interest rates, the work-from-home wave and the ongoing exodus in the Sunbelt have led to a boom in residential swimming pool construction, for which the wholesaler is perfectly positioned with a market value of almost 20 billion US dollars. 96,000 underground pools were built in the United States last year. That was 78,000 a year earlier and, according to an industry organization, the Pool & Hot Tub Alliance, exceeded an annual growth record set in 1983. Without a supply and labor shortage, it would have been even bigger. Around $ 4.6 billion was spent on construction alone, compared to $ 3.1 billion in the previous year. The enthusiasm seems to have continued through 2021 despite significantly higher personnel and material costs.
And it wasn’t just a new build. Texas – a state where the company has as many distribution centers as the entire Northeast and Midwestern United States combined – suffered from an unusual winter frost that damaged many pools this year. More than half of Pool Corp.’s sales does not require maintenance and repairs. Existing pools usually need to be overhauled every nine to twelve years. And as with home furnishings and gardens, this year many people have upgraded their pools for purely aesthetic reasons, as they spend more time at home. In addition, increased usage on weekdays has also resulted in the need for more chemicals to purify water.
These chemicals were in short supply this year due to a fire last summer at a large US supplier of chlorine tablets. Other products have also experienced severe inflation. It helps that Pool Corp. is a big buyer who is relatively well stocked, and it helps increase the company’s margins when its inventory levels rise due to such inflation. Analysts surveyed by FactSet believe Pool Corp. This year is 60% higher than in 2019 and the operating margin has reached 14.8%, compared to 10.6% in 2019.
The problem? Investors have jumped deep and priced in all of those gains and more. The well-run, steadily growing company has earned, and mostly enjoyed, a chunky valuation during its time as a publicly traded company, which averaged 20.6 times future earnings and 13.4 times company value relative to its value prior to last April Earnings before interest, taxes, depreciation and amortization. However, since the pandemic shopping and leisure habits became established, it has reached its highest level of all time and is currently a multiple of 33.6 and 24.2 times with the same measures. There was nowhere near such numbers during the previous pool construction boom during the housing bubble in the mid to late 2000s, when more pools were being built.