It's a new year, and on the Industry Focus podcast, we're exploring lesser-known companies that should have a place on your stock watchlist. In this segment, learn about Pool Corporation (NASDAQ: POOL) , the dominant player in the fragmented pool equipment and supplies market.
A full transcript follows the video.
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This video was recorded on March 6, 2018.
Vincent Shen: Both of the companies you pitched to me, Asit, I'm really glad that you brought them onto our radar. The first one is Pool Corporation, ticker POOL, very fitting. Let's jump right into it. What is Pool, and how did they end up on your radar?
Asit Sharma: I run screens, Vince, as I'm sure you do and many of our listeners do. You can find screening software on Yahoo Finance or Google Finance. I like to look at companies that have a quiet but steady trend upward. And I was doing screen filtering for mid-cap stocks. You gave the definition at the beginning of the podcast, those typically have market capitalizations between $2 billion and $10 billion. And this one popped up. I wasn't very familiar with Pool Corporation, although I know it to be a steadily growing business, and I like those businesses which, over time, inch up, because that takes some of the volatility out of your investment.
I'll jump right in and talk a little bit about Pool. It was incorporated in 1993 and had an IPO in October in 1995. This is a company which has a market capitalization of about $6 billion, and $2.8 billion in annual sales. It's the world's largest distributor of swimming pool supplies, equipment, and related leisure projects. It claims to be one of the three largest distributors of irrigation products in the United States.
This is an interesting industry, because it's very fragmented. There are a ton of manufacturers who make everything from chemicals to keep your pool clean to repair substrates, when you have to gum over the tiles in swimming pools. This company has 351 sales centers across North America, Europe, South America, and Australia, to which it sells its products to very small companies. These are everything from mom and pop pool repair shops to retail supply stores. So it has come into an industry with no real solid competitor just because, from what I've been speaking about, it's extremely fragmented. All in all, an extremely interesting under the radar company.
Shen: Yeah. I'll say, both of the companies that we're going to talk about today don't get nearly as much attention. This includes through Motley Fool coverage but also across Wall Street and the investment community, in terms of, for example, the number of research analysts covering these companies. It's always nice to bring companies like this flying under the radar to the attention of our listeners.
What you mentioned, in terms of the fragmented space, is really important here. Pool definitely enjoys some major scale and network effect benefits as the biggest player in the space. With their suppliers, for example, they can place the biggest orders. Their customers, which are mostly small businesses, they have 100,000 retail and commercial customers in total, these customers can turn to Pool as essentially their one-stop-shop for a lot of different products to fill their own inventory, which has been very beneficial for this company.
Adding some more detail to that with these numbers, they sell 180,000 products across 500 products lines and 50 product categories. Just to note, the biggest one of those is pool and spa chemicals, with about 12% of the company's revenue in 2017. Then, the large, large majority, 98% of their customers, are these really small businesses, and we really have an 800-pound gorilla for this industry here.
Breaking down a little bit more in terms of their business and their revenue, Pool has a very seasonal business, as you can imagine. Their peak activity is from April through September. Something that's really important to note here is, though you might think of pools as being generally a luxury, discretionary thing that consumers have access to that they'll spend money on, adding it to their homes. A significant portion of the revenue for the company is tied to routine maintenance and repairs, which are much more stable and dependable. With 60% or so of customer spending tied to maintenance and repairs, that's much more non-discretionary.
You can kind of see this come through during the Great Recession. This company, like many across the entire economy, took a hit. But you'll see that their maintenance and repair revenue rose to about 70% of their sales during that period. So again, still some consistency there. Then, another 25% of their top line comes from replacement and refurbishment. This is helped, because the overall age of installed pools in this country, they're aging, so they need more replacement, they need more repairs and refurbishment, which is definitely another benefit for the company. Then, the remaining 15% of revenue for Pool comes from construction.
Keep in mind, only a small base, only about 11% of the 80 million homes in the U.S. that can house a pool, have one. So there's an opportunity there. We'll also speak to how the current construction and installation of new pools is at lower levels compared to historic levels. Let's get a little bit more into some of their customer relationships, also the management team and the progress they're making. What kind of things have stood out to you, Asit?
Sharma: I wanted to expand a little bit on the statistics that you just grabbed, because it talks about the opportunity that Pool has going forward. The Great Recession, which Vince mentioned, in 2008 and 2009, really hit this industry hard, as you might imagine. The company has rebounded with the industry, but since 2008 and 2009, management says that new pool construction is still only at 50% of pre-recession levels. They see a lot of growth opportunity. Most of the industries that we cover have rebounded, and the recession is in the rearview mirror. But it's still very much in the front of companies which do the infrastructure for pools.
Now, I'm taken by this statistic. I don't personally own a pool, but we had one when I was growing up. I was so surprised to find what Vince mentioned, that only 15% of consumer spending is on new pool construction. But if you own a pool, or ever owned one, you know that the real money comes in buying those chemicals and doing the repairs. Then, there's landscaping, which is another side revenue business that this company has.
If you look at where the highest concentrations of swimming pools are in the U.S., these are also some of the fastest growing economic areas -- 94% of this company's sales are in the U.S., and that breaks down to 50% of sales in four states. And I don't think this will surprise anyone listening today. Those states are: California, Florida, Texas, and Arizona. If you think about the metropolitan areas in each of those states, these are among the fastest-growing metros in the U.S. And it's a great place if you're in an industry which is growing, to be able to be concentrated in these markets.
I talked about 95% being a concentration of revenue in North America. I'm also enthused by the fact that the global market, if the U.S. is growing at 2% to 4%, the global market is growing at an estimated compounded annual growth rate of over 10%. As developing economies in the world are starting to accelerate, there's a lot of consumer income splashing around, as we talk about often on the show, in places like Europe but especially Latin America and Asia. There's a wide ramp of revenue for a company like Pool, which has learned the gig of providing pool supplies and equipment here in the U.S., to translate that into some of these other continents. These are the things that really get me excited over the long term about this company.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Pool. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.