Drought, Falling Homeownership, And Tightened Regulations Will Curb Market Potential

Key Takeaways

• Declining homeownership, drought, and regulatory pressures are constraining core market demand and limiting growth opportunities for the company's pool installations.
  
• Overreliance on the North American market and macroeconomic headwinds heighten exposure to unpredictable revenue, while shifting consumer preferences threaten long-term sales expansion.
  
• Latham Group is leveraging market trends, technological innovation, and regulatory shifts to drive sustained growth, expanding margins, and enhanced long-term financial flexibility.

Catalysts

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

• Projected future revenue is exposed to ongoing and potentially worsening secular headwinds, including pressure on the addressable market from falling homeownership rates among younger generations and persistent affordability issues, causing the long-term pool installation market to potentially shrink below previous averages and resulting in ongoing stagnation or contraction in net sales.
  
• Severe and more frequent drought conditions, alongside intensifying water scarcity and regulatory pressures, threaten to reduce or outright ban new private pool installations in core U.S. regions-particularly in drought-prone Sand States such as Texas, Arizona, California, and Florida-thereby structurally capping future demand and directly impacting Latham's growth trajectory and top-line revenue.
  
• Latham's heavy exposure to the North American market, with only limited geographic diversification and little demonstrated global presence, leaves the company acutely vulnerable to regional economic downturns and localized demand shocks, making both earnings and net revenue more volatile and unpredictable long-term.
  
• Persistent macroeconomic uncertainty, including elevated inflation and low consumer confidence, are likely to constrain discretionary spending on big-ticket outdoor amenities such as pools, limiting both order growth and the ability for Latham to meaningfully expand margins or earnings in the coming years, regardless of near-term operational execution.
  
• Increasing preference among consumers for more affordable alternatives-such as hot tubs, rentals, or community pools-rather than costly, in-ground residential pools may permanently shift buyer behavior, creating a secular headwind for sales growth in Latham's core product categories, squeezing both volume and long-term revenue expansion.

Latham Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Latham Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Latham Group's revenue will grow by 5.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -2.5% today to 5.1% in 3 years time.
• The bearish analysts expect earnings to reach $30.8 million (and earnings per share of $0.28) by about August 2028, up from $-13.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.6x on those 2028 earnings, up from -64.9x today. This future PE is greater than the current PE for the US Leisure industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.75%, as per the Simply Wall St company report.

Latham Group Future Earnings Per Share Growth

Risks

• Latham Group is experiencing strong secular growth tailwinds from rising consumer interest in wellness, at-home recreation, and the shift toward investing in outdoor living spaces, which together expand the company's long-term addressable market and support topline revenue growth.
  
• Accelerated adoption of fiberglass pools, backed by Latham's market leadership, proprietary installation technology, and manufacturing efficiencies, is yielding higher market share, structural gross margin expansion, and the ability to outpace broader industry trends in revenue and profitability.
  
• Strategic investments in digital sales channels, AI-powered tools like Measure by Latham, and targeted national marketing are leading to improvements in customer acquisition, dealer growth, and operating leverage, which directly benefit net margins and future earnings scalability.
  
• Regulatory changes, such as more states allowing pool autocovers in place of fencing, coupled with increased demand for safety and sustainability, position Latham's high-margin autocover business as a growth engine and source of margin expansion contributing to both sales and profitability.
  
• Ongoing successful execution of accretive acquisitions, expansion into fast-growing Sand State markets like Florida and Texas, and robust cash flow management together create substantial financial flexibility and support continued increases in revenue and adjusted EBITDA over the long term.

Valuation

• The assumed bearish price target for Latham Group is $5.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Latham Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 $5.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $608.4 million, earnings will come to $30.8 million, and it would be trading on a PE ratio of 26.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $7.38, the bearish analyst price target of $5.5 is 34.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.