Pool Corp well positioned but BofA sees downside

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By Sam Boughedda

BofA initiated coverage of Pool Corp. (NASDAQ:POOL) with an Underperform rating and $291 price target in a note to clients on Thursday.

BofA analysts told investors in a research note that the world's largest wholesale distributor of pool supplies and distributor of landscaping products is well positioned to gain share in the growing pool market. However, they see downside to consensus EPS estimates driven by weaker end-market demand and near-term margin headwinds.

"POOL's 2022 revenue guidance is ~95% above 2019 levels, consisting of 30% from inflation, a 6% higher installed base, 18% M&A contribution, a 6% contribution from increased new pool revenues (25%+ higher volume vs. 2019) and a ~35% contribution from higher industry volumes, mix benefits, and share gains," they wrote.

"In 2023, we expect POOL sales growth to inflect negative and we are 8% below consensus revenue: (1) slowing end market demand, particularly for new pools and remodeling (40% of sales), which we expect to decline ~20%, (2) improving lead times across the industry leading to the reversal of ST share gains & (3) elevated channel inventory levels at a few large dealers," they added.

In addition, the analysts stated there is near-term margin pressure, but they expect long-term growth.

"Prior to the pandemic, gross margins were fairly consistent at ~29%, but climbed above 32% in 2022. While some of the margin expansion is sticky, we expect a reversion from temporary benefits," they continued. "With demand normalizing and price increases slowing, we expect gross margins to return to ~30% in 2024. Over the long-term, we expect margins to steadily climb driven by market share gains and outsized growth from the higher margin Porpoise Pool & Patio segment."

POOL shares declined more than 4% in Thursday's session.