April 2007’s Stock to Study began “People love their swimming pools, especially in Sunbelt states.” Indeed. In hindsight, we know today that the Sunbelt was then at the epicenter of an unsustainable boom in homebuilding. Maybe nothing more succinctly summarizes the period’s excesses than the exploding popularity of single-family swimming pools.
As a soup-to-nuts supplier of building materials, maintenance supplies and generally all things swimming, Pool Corporation (ticker: POOL) has done well just to tread water over the past five years. Selected at a price of $36.57, shares have rallied lately and recently traded at $34.95. Adding back $2.67 in dividends, the total return is about 3 percent.
The magazine’s Editorial Advisory and Securities Review Committee aspires to pick stocks that can double over five years. All things considered though, a flat return isn’t too bad. The broader market hasn’t done much better over the same period. Homebuilding stocks have mostly been pummeled. The saving grace has been the company’s base of recurring revenue.
As noted in the 2007 feature, much of Pool Corporation’s revenue comes from its installed base, rather than from new pool construction. In 2005, about 40 percent of the company’s sales came from materials for pool construction. In 2010, that figure was just 10 percent, yet total revenue stayed flat, as maintenance and repair revenues increased to make up for declines in construction. Companies with a high degree of recurring revenue to fall back on during bad times can offer a degree of relative safety for investors.
Miles G. Putnam is a contributor to the Investor Advisory Service, one of the nation’s top-performing investing newsletters, and a research analyst with Seger-Elvekrog Inc. in Novi, Michigan.
