Rising Rates And Drought Will Curb Sand State Expansion

Key Takeaways

• Exposure to macroeconomic, regulatory, and climate risks threatens revenue growth and increases earnings volatility, especially given dependence on new pool construction.
  
• Cost pressures and intensifying competition challenge profitability, while regulatory compliance and environmental shifts may reduce margins and stall geographic expansion.
  
• Strong growth in key states, product innovation, and effective marketing are expanding market share, improving margins, and positioning Latham for long-term profitability and resilience.

Catalysts

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

• Extended periods of high interest rates and tighter credit conditions are expected to make home equity financing more expensive, which will likely suppress discretionary consumer spending on high-ticket home improvements such as pools, directly reducing Latham Group’s addressable market and impairing long-term revenue growth targets.
  
• The increasing frequency and severity of droughts, coupled with stricter water restrictions and emerging climate-driven policies, could sharply constrain new pool permits and installations in key growth regions like Florida, Texas, Arizona, and California, stalling the company’s Sand State expansion and resulting in a prolonged drag on future revenues.
  
• Latham’s heavy reliance on new residential pool construction leaves the company highly vulnerable to cyclical downturns in the housing and home improvement markets; without meaningful diversification into renovation or service segments, revenue and earnings may become increasingly volatile in future slower macro environments.
  
• Intensifying margin pressures from ongoing volatility in raw material and logistics costs, combined with the increasing threat of low-cost international competitors and an inability to fully pass through rising input costs due to price-sensitive consumers, threaten to structurally compress net margins and limit profitability, especially in flat or contracting industry conditions.
  
• Rising regulatory scrutiny regarding pool safety, chemical usage, and environmental standards is likely to increase compliance costs and administrative burden, which will eat into margins and slow the pace of new installations, ultimately depressing long-term operating earnings and return on invested capital.

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 6.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -3.1% today to 3.0% in 3 years time.
• The bearish analysts expect earnings to reach $18.4 million (and earnings per share of $0.23) by about July 2028, up from $-16.0 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 39.4x on those 2028 earnings, up from -51.3x today. This future PE is greater than the current PE for the US Leisure industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Latham Group Future Earnings Per Share Growth

Risks

• Latham is experiencing significant early success in expanding into the high-growth “sand states” (Florida, Texas, Arizona, California), with rising market penetration, targeted marketing, and product offerings tailored to these markets, which is likely to accelerate revenue growth over the coming years.
  
• Ongoing innovation in fiberglass pools and automation tools such as “Measure by Latham” are driving market share gains, operational efficiency, and improved dealer loyalty, all of which could contribute to higher gross margins and stronger earnings.
  
• The company’s acquisition strategy—evidenced by successful integration and performance of Coverstar businesses—enhances product mix, increases organic growth in high-potential categories like autocovers, and supports sustained expansion of both top
• and bottom-line results.
  
• Rising brand awareness, digital engagement, and marketing traction (including industry-leading web search rank, influencer partnerships, and social buzz) are building a strong pipeline and positioning Latham for demand resilience and long-term market share growth, ultimately supporting higher revenues.
  
• Consistent execution of cost management, lean manufacturing, and value engineering has led to expanding gross margins despite a weak industry environment; this structural margin improvement and strong cash flow discipline position Latham to deliver improved profitability and EBITDA leverage as demand recovers.

Valuation

• The assumed bearish price target for Latham Group is $5.0, 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 $5.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $612.6 million, earnings will come to $18.4 million, and it would be trading on a PE ratio of 39.4x, assuming you use a discount rate of 7.2%.
• Given the current share price of $7.03, the bearish analyst price target of $5.0 is 40.6% 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.