business

A Cruel Summer for Pool Corp.

Shares sank Tuesday after the distributor of swimming-pool gear cut its 2007 outlook. Blame nasty weather and a slumping housing market

Pool Corp.'s (POOL) lower earnings guidance for the year offers further proof of how far-reaching the housing slump is. The news sent investors off the deep end on July 3.

The Covington (La.) distributor of swimming pool supplies and equipment cut its earnings estimate for 2007 to $1.75 to $1.85 a share from its previous forecast of $2.00 to $2.10 a share, citing a drop-off in new pool construction in June and adverse weather in certain markets.

On a conference call on July 3 to discuss its revised outlook, Pool Corp. said it had $20 million in lost sales in Texas and Oklahoma year-to-date due to excessive precipitation in those states. There's still a healthy backlog of orders at the builder level, but builders couldn't get out to work because of constant wet weather, analyst Brent Rakers at Morgan Keegan & Co. said he heard the company say during the call.

Demand in Southern California has also been hurt because of materially cooler weather than a year ago, he added.

The company now expects new pool construction to be down 10% to 20% for 2007, versus an earlier projection of a 5% to 10% decline, said Dan Whang, an equities analyst at Lehman Brothers. In a July 3 research note, Johnson Rice & Co. said that management's pool construction estimates have been too aggressive all year.

Whang at Lehman estimates that about 10 cents of the 25-cent reduction in earnings will come from weakness in the second quarter, with half of that due to a weather-related shortfall. Since the consensus view for the second quarter had been $1.22 a share, he predicted earnings would be around $1.12 a share, unchanged from a year ago.

Pool shares dove 7.3% on July 3 to $34.97, not far from their 52-week low of $33.77 reached Mar. 14.

Given pervasive uncertainty as to when the housing sector may emerge from its slump, it's not surprising that home owners are opting to wait before committing to such a big investment as a pool.

The cost of constructing a new in-ground pool is between $30,000 and $50,000. The demographics show the typical consumer is his fifties with disposable income, but pool sales tend to be correlated with housing valuation trends. Homeowners in Florida or California who may have lost as much as 10% of their home equity due to falling price are understandably much less likely to be interested in adding a pool these days, says Whang.

"Roughly half of the pools {Pool Corp.] builds are financed either through a home equity line of credit or a second mortgage or some other kind of interest-related instrument," and interest rates have been going up, he said.

But Pool Corp. said even demand for maintenance and repair of existing pools is slowing down, unlike anything it has ever seen before, according to Whang. Since initiating coverage in December, he said he's had a cautious view on the stock because of its exposure to the housing market.

Pool Corp.'s longer-term growth is intact for investors who are sufficiently patient, analysts say. Earnings improvement is now contingent on the macro-economic outlook for the housing market, which isn't expected to stabilize until next year or 2009.

Rakers at Morgan Keegam predicted there could be a significant rebound in the home improvement market within six to nine months. But Whang said there's not much clarity about when the residential housing market may improve, especially after a recent spate of negative data from homebuilders.

Neither Rakers nor Whang own Pool Corp. shares. Lehman Brothers doesn't do investment banking with the company, but Morgan Keegan and Johnson Rice do or seek to do business with the companies covered in their reports.

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