Five years ago, Pool Corporation (Nasdaq:POOL) was standing on top of the world. Its earnings were at an all-time high of $1.74 a share and its stock price was trading above $50. Then the recession came and revenues and earnings took a big hit. However, as bad as it got, it never lost money. People need to maintain their pools, especially if they want to sell their house. While its business is somewhat cyclical in nature, it has more resiliency than most people think. With the summer fast approaching, business just continues to get better. On its way back to $50, now's the time to get back in the pool.

SEE: The Ups and Downs of Investing in Cyclical Stocks.


First Quarter Results
The first quarter was a watershed period for several reasons. Generally considered a seasonally slow quarter, its 16% increase in revenues year-over-year indicates a gradual improvement in discretionary expenditures. Its base business, which is similar to same-store sales, increased by 13% in the quarter, with most of the gains coming from the swimming pool side of its business. An encouraging sign is the 2% growth in its irrigation and landscaping base business, which is far more dependent on new home construction. You shouldn't expect much growth beyond this, but it is a start.

On the earnings side of things, operating income improved 945% year-over-year to $6 million on a 150 basis point improvement on its operating margin. Farther down the income statement, earnings went from a loss of cent a share to a profit of 6 cents a share, excluding a 2 cents benefit in 2012. Its adjusted EBITDA improved by 120% to $11 million in the quarter and cash and cash equivalents increased by 81% over the past year, providing it with plenty to pay its 14 cents a share dividend. With a strong first quarter under its belt, it felt compelled to increase its 2012 earnings guidance from $1.69 to $1.79 per diluted share, to $1.75 to $1.85 per diluted share. If it hits the top of its revised guidance, it will set a company record for earnings per share in a single year.



SEE: Can Earnings Guidance Accurately Predict the Future?



Consolidation
Pool Corporation is operating a classic consolidation play. In the first quarter, it acquired five sales centers and opened four new ones, ending the quarter with 307 locations. Quarter by quarter, it's taking market share and when normal spending returns in who knows how many years, Pool will be perfectly positioned to profit from this prosperity. Remember how I referred previously to base business? Fifteen sales centers acquired between December 2010 and March 2012 had some of their sales excluded from base business calculations. Included in the list of 15 sales centers acquired, is a location in Germany: a continuation of its expansion into Europe's healthiest economy. Internationally, Pool's revenues were 184.4 million in 2011, up from $146.2 million two years earlier, but still only 10% of its overall revenues. Now operating in 10 different countries with Canada its largest international market in terms of centers open at 10 (end of 2011), the sky's the limit on what it can do outside the U.S. While business is still slowly improving on the domestic front, it can make selective acquisitions internationally. Long-term, it will pay dividends.








Pool Corporation and Peers




Company


EV/EBITDA


Pool Corporation


14.28


Brunswick (NYSE:BC)


8.13


Sturm, Ruger & Co. (NYSE:RGR)


12.50


Life Time Fitness (NYSE:LTM)


8.83


Cedar Fair (NYSE:FUN)


9.11











Valuation
Let's compare its best year on record, 2006, with its guidance for 2012. In terms of revenue, it generated $1.9 billion in 2006 and I estimate it will grow sales by 15% in 2012 to $2.06 billion, approximately 8% higher than in 2006. With respect to earnings, it generated $95 million in net income in 2006. At the low end of its 2012 guidance, Pool should deliver $85 million in net income and $90 million on the high end.
In 2006, Pool grew net income by 13%. In 2012, it will grow earnings by a minimum of 19% and another 18% in 2013. Therefore, although its earnings are slightly less than in 2006, its growth is much higher. Thus, its valuation should be equal to what it was in 2006 or slightly higher. In 2006, its share price traded at an average of 1.1 times sales. In 2012, it is slightly less than one times sales. Given that the economy is operating nowhere near full steam ahead, I believe Pool deserves a higher valuation simply for improving its business in a terrible economy.

SEE: Equity Valuation In Good Times And Bad.


The Bottom Line
Those of you in the demographics business likely would give pause to investing in Pool Corporation because of the aging population. However, the argument can be made that swimming is one of the healthiest forms of exercise available to seniors today and therefore, the need for and use of swimming pools isn't going away anytime soon. Its business is as healthy as it has ever been and yet the economy is still moribund. My recommendation is to take the 1.5% dividend and wait two or three years.

SEE: 5 Ways to get Healthy and Save Thousands a Year.



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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.



Tickers in this Article: POOL, BC, RGR, LTM, FUN

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