Pool Corp Falls 24% YTD: Time to Buy, Sell or Hold?

Pool Corporation POOL stock is reeling under the pressure of a declining top line due to weak demand for new pool construction and deferred discretionary replacement activities. This and persistent economic uncertainty and elevated interest rates further dented new pool starts.

While the decline in new pool construction presents challenges across multiple facets of operations, there is confidence that the downturn mirrors the cyclicality observed historically.

Shares of Pool Corp have declined 23.6% so far this year compared with the Zacks Leisure and Recreation Products industry's 11.8% drop. Also, the company's share price performance lagged industry players, including American Outdoor Brands, Inc. AOUT, Acushnet Holdings Corp. GOLF and Academy Sports and Outdoors, Inc. ASO.

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Factors Acting Against POOL

Year-to-date (from late May to early June 2024), Pool Corp's sales are trending down approximately 6.5% compared with the year-ago period's tally. The decline was likely due to the discretionary components of the business, which are heavily influenced by general economic conditions. The company's early projections for the peak selling season indicate a persistent decline, with new pool construction activity expected to drop 15-20% year over year. The company expects remodel activity to decline by approximately 15% year over year.

One of the most significant concerns for POOL is the weak demand for new pool construction, a trend that has been exacerbated by the current macroeconomic environment. The company reported that economic uncertainty and elevated interest rates have heavily weighed on new pool starts. Although the company reported consumer interest, the demand for lower-end pools remains a challenge. During the first quarter, permits for new pools were down 15-20% year over year.

Pool Corp's sales by major geographic markets also present a mixed picture. In the first quarter of 2024, the company sales declined by 9% in Florida, Arizona and Texas and by 4% in California. The downside was likely caused by unfavorable weather conditions. Also, the company's sales in Europe declined 17% (in local currency) and 16% (in U.S. stock dollars) on a year-over-year basis.

Given that the first quarter typically represents under one-fifth of the company's total annual sales, the upcoming quarters, especially the second quarter, remain crucial. With the peak selling season almost complete, the anticipated decline in new pool construction activity adds to the uncertainty.

Estimates Moving Down

POOL expects its 2024 earnings per share to be in the range of $11.04-$11.44, down from the prior projection of $13.19-$14.19. The Zacks Consensus Estimate for POOL's 2024 and 2025 EPS have declined 16% and 10.3%, respectively, in the past 60 days. The downward revision in earnings estimates indicates analysts' declining confidence in the stock.

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Valuations That May Deter Investor Confidence

Its P/E ratio indicates that it is overvalued compared with industry peers, which could limit short-term gains, making it less attractive than other investment opportunities. The company currently carries a Zacks Rank #5 (Strong Sell) and is trading at 25.21X forward 12-month earnings compared to the industry average of 22.69X.

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Technical indicators are negative for POOL's performance. The stock is trading below its 50-day and 200-day moving averages, signaling a bearish trend. The crossover of the 50-day moving average below the 200-day moving average warrants caution in regard to selling or avoiding the stock.

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Conclusion

Given Pool Corp's ongoing challenges with declining sales, exacerbated by weak demand for new pool construction and economic uncertainties, the outlook for the company appears increasingly unfavorable. Year-to-date performance reflects a significant underperformance compared to broader market indices, highlighting investor concerns.

The anticipated continued decline in new pool construction activity, coupled with lowered earnings expectations and a high forward P/E ratio, suggests limited potential for near-term recovery in Pool Corp's stock price. Technical indicators further support a cautious approach, with the stock showing bearish trends and negative momentum.

Considering these factors, investors are advised to avoid the stock for now.

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