Mid-2024 is a time when big ticket consumer items and the housing markets are both under pressure. Oggonomics has previously warned that the housing market in mid-2024 greatly favors home buyers rather than home sellers. Realtor data, home builder data, home spending data, and things like builder incentives all give buyers the upper hand this year. And who wants to take on a high mortgage at the moment knowing rate relief may not be far behind? Now there is more pain that been made evident in the home improvement economy that may not be reflected in many housing and home improvement stocks.
Pool Corporation (NASDAQ: POOL) has offered updated guidance and this is perhaps the only company that offers a clear insight into spending trends around the country for everyone’s back yard pools. Pool is, after all, counted as the world’s largest wholesale distributor of pool supplies and equipment (and a leading distributor in landscaping).
Oggonomics does not like to offer “parrot” reports about earnings from companies. That said, it appears that this upper hand for buyers has a lot more pain for some companies and sectors around housing and home improvements than some may be pricing in. This pain now includes anything and everything related to a family’s prized pool in the back yard.
Pool Corporation is the leader when it comes to measuring “the pool economy.” If you take the rational and statements issued by this company’s lowered guidance and insert terms like “gardens, patios, garages, front yards, indoor/outdoor remodels and so. If this truly translates into pain in these other areas of the home improvement economy then it looks like Pool is an omen that more bad news is yet to come elsewhere.
Pool gave an update on “the swimming pool season” and revised its 2024 earnings guidance much lower. It’s bad news and the already-weak stock wasn’t factoring in just how bad the news is for its investors.
Pool stated up front that non-discretionary and recurring pool maintenance and repair demand remains solid and that it sees continued organic share expansion. However, Pool also showed that discretionary pool spending “continues to be hampered by the macroeconomic environment.” What also matters here is that Pool’s second quarter is “seasonally significant” and that revenues in the quarter are running below prior expectations. This is part of the same seasonal period that is supposed to drive strong home sales.
The driving force was shown to be lower new pool construction and remodel activity. The traditional peak of “swimming pool season” is from late-May to early-June. It might as well be their equivalent to retails’ Christmas or CPA’s tax-season. According to the company’s survey data, new pool construction activity could be down 15% to 20% for the year, and remodel activity could be down as much as 15%.
Again, consider replacing “pool” with any other large expensive portions around home improvements. Patios. Gardens. Indoor/outdoor. And so on.
With lower new pool construction and remodel activity, some investors should be asking Pool just how strong the non-discretionary and recurring pool maintenance and repair demand really remains solid as the company first suggested. And while sales are sequentially better than the first quarter of the year, that should be the case in good years and bad years. Year-to-date net sales are trending down around 6.5%. Pool also said that full-year 2024 net sales are also now expected to be in a similar range (of 6.5%) and here is how bad it looks:
Pool lowered its earnings guidance to a range of $11.04 to $11.44 per share from its previous range of $13.19 to $14.19 per share.
At each midpoint, that is a drop of 18%!
Pool has also noted “cautious consumer spending on big ticket items” like swimming pools and outdoor living projects resulting in building materials down 11% versus the same period in 2023. Fortunately, it doesn’t sound like pool owners are letting the water turn into bogs nor like they are having their pools filled in. Pool said:
However, we are encouraged as maintenance-related product sales have remained stable, evidenced by volume growth in chemicals, and equipment sales (excluding cleaners) being down only 2% for the year, an improvement from the 3% decline realized in the first quarter of 2024.
The downtick in mortgage rates and the absolute need for some people to move just doesn’t matter in 2024. And this fall may come to housing standstill as presidential elections take the housing market to a screeching halt for two months or more. Pool might seem like a microcosm within housing but it is in fact the largest independent player of its kind tracking the American pool economy.
Again, take Pool’s leadership in the pool space and think about how it warned of big-ticket items and weakness in outdoor living projects. A whole slew of companies can be caught up in this. With a big drop and challenging 52-week lows, it would seem very unlikely that many of the other stocks overlapping in this space are factoring all of this negativity.
Some investors might have expected that bad news was already trying to be priced in. Just don’t forget what Oggonomics says about the Efficient Market Hypothesis — “The Efficient Market Hypothesis is not that efficient, or it just doesn’t really exist!” Pool is an industry leader and its stock had already dropped about 15% so far this year. Its shares closed at $337.91 against a 52-week range of $308.46 to $422.73. The stock was indicated down over 10% at $303.00 in reaction to the news.
There have been some analyst reactions to Pool’s news with lower earnings and revenue expectations being modeled in. Here are some of the analyst calls seen after Pool’s disappointing guidance:
- Robert W. Baird maintained its Neutral rating but slashed its price target to $305 from $380.
- Stephens & Co. maintained Overweight but cut target to $350 from $425.
- Wells Fargo maintained its Equal Weight rating but slashed its price target to $290 from $360 in its call.
- BofA Securities reiterated its Underperform rating while cutting its price objective down to $290 from $338 in its call, and BofA sees lower growth than management is modeling in for 2025 as well.
- Oppenheimer maintained its Outperform rating while still cutting its price target down to $356 from $416.
Why does it feel like there are more shoes to drop in the weak housing segment?
