Fiberglass Pools Will Expand Market Presence In Sand States

Key Takeaways

• Expansion in the sand states via fiberglass pools and marketing initiatives aims to boost market penetration and drive revenue growth.
  
• Lean manufacturing, value engineering, and strategic acquisitions are enhancing margins and positively impacting earnings and EBITDA.
  
• Heavy reliance on fiberglass pools and expansion into sand states pose risks if consumer preferences shift, competitors innovate, or targeted market conversions underperform.

Catalysts

Designs, manufactures, and markets in-ground residential swimming pools in North America, Australia, and New Zealand.

• Latham Group is focusing on expanding its market share of fiberglass pools, particularly in the sand states (Florida, Texas, Arizona, and California) where fiberglass is underpenetrated compared to concrete pools. This strategy is expected to drive considerable sales growth, impacting revenue positively.
  
• The company has implemented a lean manufacturing and value engineering initiative, resulting in substantial gross margin expansion. These ongoing efforts are set to structurally improve costs and drive EBITDA margins higher, impacting earnings positively.
  
• The acquisition of Coverstar Central and the vertical integration of its automatic safety cover line provide revenue synergy opportunities. This integration is expected to enhance EBITDA margins further, impacting earnings.
  
• Latham's marketing strategy, including targeted campaigns like the GOOTSA initiative, focuses on converting concrete pool builders to fiberglass, creating more significant market penetration opportunities in the sand states. This is expected to bolster revenue growth.
  
• The company plans to continue investing in new fiberglass pool models and expanding its dealer network in high-growth areas, supported by its strong financial position. These strategic investments are aimed at capturing incremental sales and increasing market demand, impacting revenue and earnings growth.

Latham Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Latham Group's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.5% today to 5.1% in 3 years time.
• Analysts expect earnings to reach $31.0 million (and earnings per share of $0.27) by about March 2028, up from $-17.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.8x on those 2028 earnings, up from -47.5x today. This future PE is greater than the current PE for the US Leisure industry at 18.2x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.44%, as per the Simply Wall St company report.

Latham Group Future Earnings Per Share Growth

Risks

• The company is heavily reliant on fiberglass pools, with 75% of their in-ground pool sales in this category, which could be a risk if consumer preferences shift away from fiberglass or if competitors introduce superior fiberglass alternatives, potentially impacting revenue growth and market share.
  
• Sales growth is tied significantly to the expansion in the sand states, which could face execution challenges due to the established preference for concrete pools in these areas, risking lower-than-expected net margins if the conversion to fiberglass does not happen as anticipated.
  
• The company's margin improvement strategy hinges on continued execution of lean manufacturing and value engineering initiatives. Any disruption or failure in achieving these cost savings could adversely affect net margins and earnings.
  
• Tariff exposures, especially from materials sourced internationally, present a risk of increased costs, which may not be fully mitigated by pre-buying strategies or price adjustments, potentially impacting gross margins and bottom-line earnings.
  
• Latham Group’s strategy involves significant marketing and sales investments, especially in new markets like the sand states. If these initiatives do not translate into expected sales or if the broader economic environment affects pool demand, the return on these investments may be unfavorable, impacting overall earnings and cash flow stability.

Valuation

• The analysts have a consensus price target of $7.057 for Latham Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $5.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $612.3 million, earnings will come to $31.0 million, and it would be trading on a PE ratio of 32.8x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $7.33, the analyst price target of $7.06 is 3.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.