In addition to presenting high-conviction investment ideas, we also reverse engineer great investors’ theses to improve our process.
Pool Corp. has a leading position in a good industry and has demonstrated the ability to consistently grow FCF/share in the mid-teens with a high ROIC.
The current post-COVID pool industry downturn has led to negative sentiment, and long-term investors of great companies such as Berkshire see this as an opportunity to buy a great company at a “fair” price.
We use a reverse DCF to impute that consensus expects FCF to grow in the mid-single digits, which is below historical levels.
While it is unclear if the pool industry is “out of the woods” yet based on expert network channel checks from AlphaSense, it is likely based on peer ‘25 revenue growth commentary that Pool Corp. might envision a return to low single-digit growth in 2025 as consensus expects (+3.4%).
This might cause some of the remaining 2.6 MM (7% of float) shares short (down from 4.4 MM shares in 2023) to abandon their thesis.
Earnings revisions will be the key.
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Berkshire’s Investment Checklist:
00:00 Intro
05:02 Is this business in my CIRCLE OF COMPETENCE?
Yes, I covered the pool industry as a PM at Millennium, and it’s a relatively simple business to understand.
06:28 What is the MARGIN OF SAFETY?
No replacement value or BV support. Good business as measured by ROIC and FCF and a leading position in a good industry where scale has advantages.
10:00 Is the stock available BELOW INTRINSIC VALUE?
No, the stock seems fully valued at a 4% unlevered FCF yield.
What is Berkshire’s Potential VARIANT VIEW?
Berkshire likely thinks the company can get back to mid-teens FCF/share growth per historical trends vs the implied consensus of mid-single digit growth.
17:28 Does the business operate in a GOOD INDUSTRY?
Yes, the pool distribution business is a good industry. It is mostly recurring revenue and asset light.
19:55 Is this a BAD, GOOD, or GREAT BUSINESS?
Great business at an “almost fair price” in a post-COVID downturn.
21:36 Does the business have a WIDE MOAT?
The company has constantly generated excess ROIC and has advantages in its store locations being near customer pool routes, in being the largest buyer from manufacturers to obtain procurement discounts, in having a large footprint to optimize inventory management, and a leading tech interface for customers.
24:11 Are management INCENTIVE ALIGNED?
Yes, management is compensated on ROIC and EPS growth.
28:18 Is this one of your 20 lifetime PUNCH CARDS?
No, it is not one of my lifetime 20 investments.
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▶️ MORE EPISODES:
BNED: 3x Return Potential Post Recap https://youtu.be/P6xy67DtqQ4?si=S7RyvfnPceYAmJGx
ZM: Growth Acceleration, A Catalyst https://youtu.be/D8THaDUBkTA?si=gKYXfFLL6nLUVnu
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⚠️ Disclaimer: This is for educational purposes. It is not investment advice. Contact your financial advisor for suitable investments for you.
