Shareholders of Pool would probably like to forget the past six months even happened. The stock dropped 26.3% and now trades at $217.81. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Pool, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Pool Will Underperform?
Even with the cheaper entry price, we don't have much confidence in Pool. Here are three reasons there are better opportunities than POOL and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Pool’s 6.1% annualized revenue growth over the last five years was weak. This was below our standard for the consumer discretionary sector.
2. Projected Free Cash Flow Gains to Pump Profits
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Pool’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 5.9% for the last 12 months will increase to 8.7%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Pool’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Pool falls short of our quality standards. After the recent drawdown, the stock trades at 19.5× forward P/E (or $217.81 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d suggest looking at one of our top software and edge computing picks.
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