Pool Industry Woes Meet Hope In Innovation And Critical Acquisitions

Key Takeaways

• Forecasted decline in new pool starts poses risks to future revenue, amidst efforts to improve profitability through restructuring and cost management.
  
• Strategic focus on acquisitions, such as Coverstar Central, and product diversification, including the vinyl plunge pool, aims to mitigate market demand challenges and drive growth.
  
• Latham Group's strategies and acquisitions aimed at expanding its product lines and improving efficiency indicate potential for increased market share, revenue, and profitability.

Catalysts

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

• Latham's forecast anticipates a 15% decline in new pool starts, potentially impacting future revenue growth as market demand decreases for their primary product segment.
  
• Despite a drop in sales volume, profitability improved due to restructuring and cost containment efforts. However, sustained lower sales volumes could challenge future earnings, particularly if market conditions worsen or restructuring benefits plateau.
  
• The acquisition of Coverstar Central is expected to expand margins and accelerate sales of the automatic safety cover product line. While accretive, reliance on acquisitions for growth in a declining market might pressure long-term organic growth capabilities and affect net income if synergies fail to materialize as expected.
  
• Investments in new products, like the vinyl plunge pool launch in 2025, suggest a strategic pivot to diversify offerings. The success of these initiatives is critical to offset declining pool starts, with significant implications for both revenue and margin expansion.
  
• The emphasis on driving awareness and adoption of fiberglass pools and automatic safety covers as long-term growth drivers indicates a potential shift in market dynamics. Failure to significantly penetrate markets or change consumer preferences could impact revenues and net margins if the anticipated demand increase doesn't materialize.

Assumptions

• Analysts are assuming Latham Group's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.2% today to 1.7% in 3 years time.
• Analysts expect earnings to reach $10.1 million (and earnings per share of $0.09) by about August 2027, down from $11.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 70.7x on those 2027 earnings, up from 58.0x today. This future PE is greater than the current PE for the US Leisure industry at 16.8x.
• Analysts expect the number of shares outstanding to grow by 0.64% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Risks

• Latham Group's strategy of driving awareness and adoption of fiberglass pools and automatic safety covers could significantly increase its market share and sales in these categories, potentially boosting the company's revenues.
  
• The company's successful restructuring programs and lean manufacturing initiatives have already shown to improve profitability and efficiency, suggesting a positive impact on net margins.
  
• Latham's acquisition of Coverstar Central is expected to expand margins and accelerate sales of automatic safety cover product lines, potentially enhancing both revenue and adjusted EBITDA.
  
• The increased focus on innovation, such as the launch of new fiberglass pool models and the development of vinyl plunge pools, caters to consumer preferences for cost-efficient, eco-friendly pools with quick installation times, likely driving sales growth.
  
• Strong financial management and the capacity to make accretive acquisitions indicate a resilient balance sheet, which could support further growth and profitability, positively affecting earnings.

Valuation

• The analysts have a consensus price target of $4.88 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 $7.0, and the most bearish reporting a price target of just $2.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $591.0 million, earnings will come to $10.1 million, and it would be trading on a PE ratio of 70.7x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $5.86, the analyst's price target of $4.88 is 20.0% 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.