On Dec 30, we issued an updated research report on Pool Corp. (POOL).
On Oct 16, 2014, Pool Corp. posted third quarter 2014 results wherein earnings came in line with the Zacks Consensus Estimate while revenues missed the same. Also, the company tightened its earnings per share expectation for 2014 to a range of $2.38–$2.43 from the prior guidance of $2.35–$2.45 to account for the expected seasonality in the fourth quarter.
Pool’s third-quarter earnings of 78 cents per share increased 14.7% year over year driven primarily by higher year-over-year sales. Net sales came in at $615.5 million and grew 6% year over year due to an increase in base business sales. Replacement and remodel activities continued to drive sales growth with sales increases in building materials. Despite a 5.7% year-over-year increase in cost of sales, gross profit was up 8.4% to $176.2 million due to higher sales. Further, gross margin increased 50 basis points to 28.6%.
The U.S. housing market has witnessed some meaningful improvement in recent times, with both new and existing-home markets gaining strength. Builder sentiment, housing starts and existing home sales have increased over the past few months. Lower mortgage rates and moderating home-price increases have led to a modest recovery in the housing market in the second half of this year compared with the first half. With the improving new home construction market, the company’s Green business – which involves construction and installation of new pools and landscaping and represents around 8% of total sales – has witnessed a boost in sales.
Maintenance and upkeep of pools ensure a steady revenue stream for the company even during an economic downturn. The existing pools have generated revenues throughout 2014 and the trend is expected to continue in the coming year as well.
However, the moderate improvement in economic growth notwithstanding, consumers are increasing their discretionary spending only slightly, as an increase in jobs this year is yet to translate into significantly higher wages. Also, higher health care costs and still-tightened credit availability continue to hurt consumer discretionary spending in the U.S. As a result, Americans are unwilling to spend on goods such as pools, pool supplies, irrigation and landscaping products, which is pulling down the company’s sales. Also, the seasonality of the Pool business prevents us from being too optimistic at the current level.
The company presently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Black Diamond, Inc. (BDE) and Polaris Industries Inc. (PII). While Black Diamond sports a Zacks Rank #1 (Strong Buy), Polaris Industries carries a Zacks Rank #2 (Buy). One can also consider Carnival Corporation (CCL) from the wider consumer discretionary sector with a Zacks Rank #2 (Buy).
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