Suburban Shifts And Sunbelt Expansion Will Create Future Opportunity

Key Takeaways

• Strong positioning in high-growth regions, product innovation, and strategic acquisitions are driving market share gains, top-line growth, and rising margins.
  
• Efficiency improvements in manufacturing and value engineering are boosting profitability and supporting robust EBITDA leverage as industry demand strengthens.
  
• Reliance on a weak housing market, challenging regional expansion, tougher consumer financing, rising expenses, and high debt all threaten Latham's revenue growth and financial flexibility.

Catalysts

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

• Latham is capitalizing on increased consumer affluence and the cultural shift toward prioritizing outdoor living and home recreation, shown by targeted marketing campaigns and dealer expansion in high-growth Sunbelt markets. This positions the company to accelerate revenue growth as economic and housing headwinds abate.
  
• The ongoing suburbanization trend and consumer desire for health, wellness, and at-home amenities are driving demand for in-ground pools, and Latham's market-leading positions and #1 share in every category offer significant potential for above-market revenue and EBITDA growth as overall pool starts rebound toward historical averages.
  
• Latham's emphasis on expanding and promoting its innovative fiberglass pool line, which resonates with both consumers and dealers due to its ease and speed of installation and lower maintenance requirements, is enabling continued market share gains and higher-margin product mix, which should support both top-line growth and margin expansion.
  
• The company's investments in automation, lean manufacturing, and value engineering are resulting in structurally higher gross margins-with recent quarters showing 400 bps improvement year-over-year-and these efficiency gains are expected to meaningfully boost net margins and EBITDA as volumes rise.
  
• Expansion into the underpenetrated Sand State markets (Florida, Texas, Arizona, California) and the successful acquisition and integration of high-margin autocover dealers are increasing Latham's addressable market and driving incremental gains in sales, margins, and cash flow, with forward guidance and strategic commentary pointing to substantial earnings and EBITDA leverage as industry conditions improve.

Latham Group Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Latham Group's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 4.7% in 3 years time.
• Analysts expect earnings to reach $32.1 million (and earnings per share of $0.25) by about May 2029, up from $8.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $19.0 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 38.6x on those 2029 earnings, down from 66.4x today. This future PE is greater than the current PE for the US Leisure industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

Risks

• The company's sales remain highly exposed to broader housing market cycles, with management noting "the pool market being in a trough period" and annual U.S. pool starts still well below the long-term average; ongoing weakness in home construction, cautious consumer sentiment, or persistently high interest rates could create structurally softer demand and limit long-term revenue growth.
  
• Latham's substantial growth strategy hinges on expanding in "Sand States" (Florida, Texas, Arizona, California), but current results show only about 17% of pool revenue from these regions and acknowledge that permit activity and market conditions have been "really tough"; failure to accelerate adoption in these competitive, weather
• and regulation-sensitive regions may constrain both top-line growth and earnings potential.
  
• The pool market has shifted toward "primarily cash purchasers" for new installations, reflecting ongoing challenges in consumer financing availability; if higher interest rates and tighter credit persist, this secular headwind could dampen demand for new pools and renovations, pressuring Latham's core revenue base and net margins.
  
• Increased investments in marketing and new product/dealer expansion have driven up SG&A expenses ("SG&A expenses increased to $31.9 million, up $5.3 million" y/y), and while management cites strong lead growth, there's risk that these outlays may not convert to actual pool orders if near-term consumer conversion lags, potentially squeezing net profit margins.
  
• The company's net debt leverage ratio of 3.0x (with $281 million in total debt) may constrain its ability to further invest in innovation, marketing, or M&A should operating cash flow weaken in a slow demand environment; higher interest payments amid a challenging macro backdrop could impede future earnings growth and financial flexibility.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $8.14 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 $13.0, and the most bearish reporting a price target of just $5.5.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $680.5 million, earnings will come to $32.1 million, and it would be trading on a PE ratio of 38.6x, assuming you use a discount rate of 8.2%.
• Given the current share price of $4.84, the analyst price target of $8.14 is 40.6% higher.
• 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.