What happened
Shares of in-ground residential swimming pool designer and manufacturer Latham Group (SWIM -3.77%) were up more than 10% on the week as of 3 p.m. EDT on Thursday. The move is largely down to a so-called "relief rally" in the stock after its peer, Pool Corp. (POOL -0.34%) released a robust set of third-quarter results.
Pool Corp. is the world's largest swimming pool products distributor, including Latham's products. Meanwhile, Latham is the leading manufacturer and designer of fiberglass in-ground residential swimming pools in North America and the leading player in the replacement-liner market and safety covers for swimming pools.
Image source: Getty Images.
The stock only began trading on April 23 at $19, but unfortunately, it's been pretty much downhill since. It now trades at around $15 at the time this was written. The reason for the lackluster performance? It probably comes down to a combination of value concerns and worries that its end markets are about to soften significantly.
At the initial public offering price of $19, Latham trades at 30 times its estimated 2022 earnings, and even after the fall, it still trades on an expensive-looking 24 times. As for end markets, it's no secret that swimming pool spending surged during the pandemic as consumers elected to spend more time at home. So the fear is that Latham came to the market precisely when the industry was about to slow from the torrid growth created by the pandemic.
In addition, investors were perplexed by the resignation of chief operating officer Jeffrey Leake on Sept. 8 to "pursue other opportunities" just 15 months after being appointed.
So what
Fortunately, the end-market fears were assuaged by Pool Corp.'s excellent third-quarter results -- year-over-year net sales increased by a whopping 24% in the quarter, and management promptly raised its full-year EPS guidance to $14.85 to $15.35 from a previous range of $13.75 to $14.25.
Image source: Getty Images.
Pool Corp. CEO Peter Arvan said, "The strong demand trends combined with our focused strategic initiatives and ability to execute them make us well-positioned for the remainder of 2021 and into next season."
It all reads well for Latham Group, and the consumer discretionary stock surged as a consequence of what Pool Corp. reported. The company releases its third-quarter earnings data on Nov. 10, and there's a sense that the company could outstrip expectations. Moreover, it appears that the surge in pool-related spending has legs beyond the pandemic.
Now what
Wait and see what Latham Group reports and says about 2022. Current trading is likely to be strong, and the company has a long-term growth opportunity from increasing the market penetration rate of fiberglass pools compared to concrete pools.
