Warren Buffett, the legendary billionaire investor and CEO of Berkshire Hathaway, has made waves again with his latest stock pick: Pool Corp. (NASDAQ: POOL). For investors, this move has sparked curiosity about the swimming pool supply giant and what it could mean for their portfolios. But before you dive in and buy shares of Pool Corp., there are several important factors to consider. Let’s take a closer look at the key details behind this investment and what potential buyers should know.
1. What Exactly Does Pool Corp. Do?
Pool Corp. is the world’s largest distributor of swimming pool supplies, making it a key player in the pool industry. The company provides everything pool owners need, from installing new pools to offering repair and maintenance services. With most of its sales coming from the U.S., Pool Corp. has a significant market presence, generating about $5.3 billion in annual revenue.
while new pool installations drive the business, Pool Corp.’s real strength lies in recurring sales from ongoing pool maintenance and supplies. Once a pool is installed, the company taps into steady demand for chemicals, cleaning equipment, and repairs, which creates a consistent revenue stream that continues long after the initial sale.
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2. A Cyclical Business Model
Investors should note that Pool Corp. operates in a cyclical industry. Around 40% of its revenue comes from larger, one-time projects like new pool installations and major repairs. This makes the business sensitive to economic conditions. When interest rates rise or consumers tighten their belts, these expensive purchases tend to slow down.
The pandemic was a major boon for Pool Corp., as low interest rates and stimulus checks boosted consumer spending. However, as the Federal Reserve raised rates and stimulus funds dried up, the company’s earnings have dipped, and its stock price is currently down 37% from its peak.
3. A Compounder of Wealth
Despite the cyclical nature of the business, Pool Corp. has proven itself to be a wealth-building machine. The company is the undisputed leader in a highly fragmented industry, and it continues to grow both organically and through acquisitions. The results speak for themselves: Pool Corp. has delivered 53,000% returns since going public in 1995.
One of the reasons for such incredible growth is the company’s ability to generate a high return on invested capital (23.5%), allowing it to reinvest profits efficiently without needing to pour excessive amounts of money into the business.
4. Returning Cash to Shareholders
Pool Corp. is known for its financial efficiency, which translates into cash flow that exceeds its operational needs. What does the company do with this extra cash? It returns it to shareholders through dividends and share buybacks. Over the years, this strategy has helped drive the stock’s performance even higher.
As a result, Pool Corp. investors have benefitted from a growing dividend and a shrinking share count, both of which are positive for long-term shareholders.
5. Room for Long-Term Growth
The long-term outlook for Pool Corp. looks promising, with the swimming pool industry expected to grow steadily in the coming years. There’s a housing shortage in the U.S., which means more people may opt for pool installations as part of home improvement efforts.
Management estimates that the market will grow by about 6% to 7% annually, and the company is also looking at growth opportunities in niches like DIY pools and commercial markets. With these strategies in place, Pool Corp. is expected to see revenue growth of 6% to 9% annually and earnings growth of 12% to 14% over the next several years.
Moreover, the potential impact of climate change could fuel further demand for pools, especially in warmer climates, which may make Pool Corp. a sneaky long-term play on the effects of rising temperatures.
6. Buffett’s Stake is Small, but Significant
Warren Buffett’s investment in Pool Corp. may have caught attention, but it’s important to note that his stake in the company is relatively small. Berkshire Hathaway’s purchase amounts to a 1.1% stake, which is still notable given the company’s market cap of just under $14 billion.
However, this is a drop in the ocean compared to the massive size of Berkshire’s portfolio. Buffett’s decision to dip his toes into the pool sector, rather than diving in headfirst, suggests he’s testing the waters before making a bigger commitment. If Berkshire Hathaway buys more shares, it could be an indication that Buffett is even more bullish on Pool Corp. than he has let on.
7. Valuation: Not So Simple
Pool Corp. currently trades at a forward P/E ratio of 32, which may seem steep at first glance. Analysts project that the company will grow its earnings by about 15% annually over the next three to five years. With a PEG ratio of 2, the stock is priced reasonably for a high-quality business like Pool Corp.
However, due to its cyclical nature, the stock’s valuation could fluctuate based on factors like interest rates and the overall economic environment. Given these uncertainties, it may be wise for investors to use dollar-cost averaging to gradually build a position in the stock. This strategy would allow investors to take advantage of price fluctuations and lower their risk over time.
Is Pool Corp. a Good Investment for You?
Before rushing to buy shares of Pool Corp., investors should carefully weigh the risks and rewards. While the company has proven itself to be a strong performer in the long run, its cyclical business model and reliance on discretionary spending can create volatility.
It’s also worth noting that the Motley Fool’s Stock Advisor analysts recently identified 10 stocks that they believe offer even greater potential for returns than Pool Corp. For example, if you had invested $1,000 in Nvidia when it was first recommended by Stock Advisor back in 2005, you’d be sitting on a staggering $858,854 today.
While Pool Corp. has a solid track record, it may not be the best choice for every investor, especially those looking for more stability in their portfolios.
In summary, Warren Buffett’s investment in Pool Corp. is a compelling signal for investors, but as always, proceed with caution and do your own research. If you believe in the company’s long-term growth prospects and can weather the cyclical nature of its business, Pool Corp. could be a valuable addition to your portfolio.