Warren Buffet's Billionaire Venture, Berkshire Hathaway, Includes Pool Corp. in Its Investment List. Essential Information for Investors Contemplating Buying Shares in the Stock.
Billionaire investor and mogul Warren Buffet invests through his corporation, Berkshire Hathaway. Buffet's prestige and accomplishments have made him a significant figure in Wall Street, causing people to closely monitor the stocks he buys and sells. Berkshire Hathaway made headlines this year by selling enough stocks to boost its cash reserves to an astounding $325 billion, a massive financial arsenal capable of purchasing nearly any company Buffet desires.
Berkshire Hathaway recently disclosed its stock trades in the latest quarterly 13F, revealing that it has added Pool Corp. (POOL -1.78%) to its portfolio as a new holding.
Purchasing a stock acts as a seal of approval from Buffet, suggesting he is optimistic about the company. If you're considering investing in Pool Corp., take a moment to research this lesser-known company, particularly since Buffet is now an investor.
Here are seven items to keep in mind before investing in the stock:
1. The business of Pool Corp.
Pool Corp. is the globe's leading wholesale distributor of swimming pool supplies and equipment. It manufactures and installs new pools, offers maintenance and repair services, and sells the maintenance products and services pool owners frequently require. The vast majority of its sales come from the U.S.
Each pool installation creates a long-term customer, causing Pool Corp.'s revenue mix to gradually shift toward recurring revenue from supplies and maintenance. In total, Pool Corp. generates approximately $5.3 billion in annual sales.
2. A cyclical business
The business is cyclical since 40% of Pool Corp.'s revenue depends on expensive installation and repair jobs. In simple terms, fewer individuals are likely to invest in new pools or costly repairs when dealing with financial struggles or when high-interest rates make financing difficult.
Pool Corp.'s earnings skyrocketed after the pandemic due to low-interest rates and stimulus checks, generating increased consumer spending. However, earnings have taken a significant drop since the Federal Reserve raised rates and stimulus spending waned. Consequently, the stock has fallen 37% from its peak.
3. A compounder
Pool Corp. dominates the highly fragmented swimming pool industry, providing it a competitive advantage as the largest player. The company expands both organically and through acquisitions, and its management team effectively manages Pool Corp.'s financial capital. Pool Corp. generates a substantial return on invested capital (ROIC) of 23.5%, enabling it to produce profits without investing heavily in the business.
This efficiency and consistent revenue growth have transformed the stock into a substantial investment. Pool Corp. went public in 1995 and has generated an astounding 53,000% return over its lifetime. This surpasses the broader stock market, making Pool Corp. a legitimate million-dollar maker.
4. Returning value to shareholders
Pool Corp.'s financial efficiency results in more available cash, which it returns to shareholders via dividends and share buybacks. The company's share count has decreased while its dividend has grown, contributing to Pool Corp.'s impressive stock performance.
5. Ample space for long-term growth
Swimming pools are an enduring fixture, which suggests future demand for new installations due to the U.S.'s housing shortage. Additionally, management is targeting potential growth opportunities in industry niches, including the do-it-yourself and commercial markets. Management projects its market will expand around 6% to 7% annually.
This has led to long-term revenue and earnings forecasts of 6% to 9% annual growth and 12% to 14% earnings growth. I find Pool Corp. appealing as a stealthy long-term play on climate change, given the potential for increased pool demand in developed markets like the U.S. due to rising temperatures.
6. Buffet's stake is minimal
Buffet's commitment to Pool Corp. is substantial, but his investment represents only a 1.1% stake in the company. Although it is an impressive investment, it is relatively minor compared to Berkshire's extensive portfolio.
Buffet has chosen to dip his toe in the Pool Corp. waters rather than fully immersing himself, making it intriguing to observe if Buffet increases his stake in the company.
7. The stock's valuation is complex
From a numerical perspective, Pool Corp. trades at a forward P/E of 32. Analysts estimate the company's annual earnings growth over the next three to five years to be around 15%. This results in a PEG ratio of 2, a reasonable price for a high-quality business. Pool Corp.'s high ROIC and growth prospects enticed me (and perhaps Buffet, too) to the stock.
However, the company's cyclical nature makes it difficult to trust its valuation without considering interest rates and the economy's future performance. The solution? Utilize dollar-cost averaging to gradually build a position, allowing the compounding power of Pool Corp. to eventually match its valuation.
Buffet's investment in Pool Corp. represents just a 1.1% stake in Berkshire Hathaway's extensive portfolio, indicating that while he sees potential in the company, he is not committing a significant amount of his financial resources.
Investors interested in Pool Corp. should note that while the company boasts a high return on invested capital (ROIC) of 23.5%, its business is cyclical, with 40% of its revenue depending on expensive installation and repair jobs. This means earnings can be affected by economic conditions and interest rates, as seen during the pandemic and subsequent Federal Reserve rate increases.
