Pool Corporation

Executive Summary

VERDICT: ACCUMULATE at current prices. Thesis intact - cyclical weakness, not structural impairment.

---

Why Is POOL Down 19.54%?

Primary Drivers of Decline

1. New Pool Construction Collapse (-15% to -20% YoY)

   • Housing market weakness due to high interest rates
   • Entry-to-mid-level pool buyers most affected
   • New pool construction down from ~100K units (2021) to ~55-60K units (2024)

2. Renovation/Remodel Activity Weakness (-10% to -15%)

   • Discretionary spending pullback
   • Consumers deferring major projects
   • High-end renovation demand more resilient

3. Margin Compression

   • Operating margin declined from 16.6% (2022 peak) to 11.6% (2024)
   • Lower building materials mix (higher margin products)
   • Larger customers gaining share (lower margins)

4. Revenue Normalization

   • Revenue peaked at $6.18B (2022), now $5.31B (-14%)
   • Post-COVID demand surge has fully unwound
   • 2024 revenue 4% below 2023

Is This Fundamental Deterioration or Cyclical Weakness?

CYCLICAL WEAKNESS - NOT STRUCTURAL IMPAIRMENT

Evidence:

• Maintenance business (60% of sales) remains stable and growing
• Chemical volumes UP 3-4% even with poor weather
• Equipment sales holding steady (aftermarket is 4x new construction)
• Installed pool base continues to grow (+60K pools/year)
• Company gaining market share through downturn
• Management confirms "phones are ringing" - pent-up demand exists

---

The Distribution Moat: Real or Illusory?

The Moat Is REAL - Here's Why

1. Scale Economics (Network Effect)

• 445+ sales centers across North America
• Closest competitor (SRS/HD) has ~200 locations
• Average service radius creates natural geographic barriers
• Density enables same-day delivery (critical for pool service pros)

2. Customer Switching Costs

• POOL360 digital ecosystem locks in customers
• 14.5% of orders now through B2B platform (growing from 10%)
• Water testing software tied to private label chemicals
• CRM and routing tools create operational dependency

3. Private Label Expansion

• Regal, E-Z Clor, Life chemical brands with superior margins
• Chemical packaging facility provides cost advantage
• Double-digit growth in private label chemicals

4. Supplier Relationships

• Largest distribution partner for major equipment OEMs
• First access to new products and innovations
• Volume-based vendor incentives provide margin support

Competitive Position Update

Management commentary on Home Depot/SRS acquisition (Q3 2024):

"We're going to take Home Depot and SRS at their word and maintain that not much will change... the channel to market remains unchanged."

The acquisition of SRS by Home Depot has NOT materially changed competitive dynamics. POOL remains the clear #1 with 2x the footprint.

---

Normalized Earnings Power Analysis

Historical Earnings Context

Normalized Earnings Estimate

Conservative Base Case: $12-13 EPS

Assumptions:

• New pool construction normalizes to ~80K units (vs 55K today, 100K+ peak)
• Renovation activity recovers modestly
• Maintenance continues 1-2% growth with installed base
• Gross margin stable at 30%
• Operating margin recovers to 13-14%

Bull Case: $14-15 EPS

• Interest rate cuts stimulate housing market
• Pent-up renovation demand released
• New construction rebounds faster

Bear Case: $10-11 EPS

• Recession impacts consumer spending
• New construction stays depressed
• Margin pressure continues

Valuation Analysis

Current price implies low-end earnings power. Upside significant if normalization occurs.

---

Housing/Construction Cyclicality Assessment

Key Macro Factors

Permit Data Trends (Per Management Q3 2024)

• Arizona: Permits turned positive in March 2024
• Florida: Stabilizing, hurricane disruption temporary
• Texas: Lagging but improving
• California: Lagging, weather-sensitive

Management Outlook (Q3 2024 Earnings Call)

"We remain encouraged by several economic factors such as stable home values, record home equity levels, continuing sunbelt migration, a resilient consumer, and gradual interest rate easing."

"The installed base is 20% to 25% bigger than in 2019... we believe it is coming closer to normalization."

---

Financial Health Check

Capital Structure

Cash Flow Quality

Capital Allocation Priorities

1. Organic Growth: 10 new locations/year, technology investment
2. Dividends: 14+ years of consecutive increases
3. Buybacks: $507M remaining authorization
4. Debt Reduction: $400M paid down since peak

---

Return on Capital Analysis

Historical ROIC/ROE Trends

29% ROE in a cyclical trough is exceptional. This is a high-quality compounder temporarily out of favor.

Why ROE Remains High Despite Earnings Decline

1. Capital-light distribution model
2. Minimal fixed asset requirements
3. Working capital efficiency
4. Consistent debt reduction
5. Share buybacks reducing equity base

---

Key Risks

1. Prolonged Housing Market Weakness

• Probability: Medium
• Impact: EPS stays $10-11 range for 2-3 more years
• Mitigation: 60% of business is maintenance (recurring)

2. Competitive Pressure from HD/SRS

• Probability: Low-Medium
• Impact: Margin pressure
• Mitigation: 2x scale advantage, digital ecosystem stickiness

3. Weather Volatility

• Probability: Ongoing
• Impact: Quarterly volatility
• Mitigation: Geographic diversification

4. Consumer Sentiment Deterioration

• Probability: Medium
• Impact: Renovation/discretionary delay
• Mitigation: Maintenance is non-discretionary

---

Investment Thesis Summary

Original Thesis Elements

What Has Changed

1. New construction lower for longer than expected - 2+ years of decline
2. Margin compression more significant - 500bps from peak
3. Valuation contracted - P/E from 40x to 21x

What Has NOT Changed

1. Market leadership position
2. Competitive moat durability
3. Free cash flow generation quality
4. Balance sheet strength
5. Management execution
6. Long-term industry growth drivers (installed base, demographics)

---

Recommendation

ACCUMULATE

Rationale:

1. Thesis Intact: Core investment thesis of distribution moat, market leadership, and recurring revenue model unchanged
2. Cyclical Not Structural: Decline driven by housing cycle, not competitive deterioration
3. Valuation Attractive: P/E at 21x on trough earnings; normalized earnings of $12-13 implies P/E of 17-19x
4. Catalyst Path: Interest rate cuts -> housing recovery -> new construction normalization
5. Margin of Safety: Trading near 3-year lows with 40% upside to analyst targets
6. Quality Intact: 29% ROE, 6% FCF yield, conservative balance sheet

Price Targets

Position Sizing

For an OWNED position down 19.54%:

• Current position: HOLD (do not sell into weakness)
• Available capital: ADD to position at current levels
• Maximum weight: Consider 3-5% portfolio weight for high-conviction investors

---

=== VERDICT: POOL | ACCUMULATE | Reason: Cyclical trough in durable franchise; thesis intact, adding at $231 offers 40%+ upside to normalized fair value ===

---

Data Sources

• AlphaVantage API: Financial statements, company overview, dividends
• EODHD API: Historical stock prices (5 years)
• Management Earnings Calls: Q1-Q3 2024 transcripts

Analysis Date: December 25, 2024 Next Review: After Q4 2024 earnings (February 2025)