This Swimming Pool Leader Is a Good Play in the Housing Recovery

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since the bottom of 2009, Pool Corporation (NASDAQ: POOL) has been on a rising trend, from nearly $11.60 per share in March 2009 to more than $53.50 per share. This company is in the portfolios of many famous investors including Joel Greenblatt and Jim Simons. Sandy Villere of Villere Balanced Fund was also bullish about this company, mentioning that it had a dominating position in the industry with its pricing power. Let’s take a closer look to determine whether or not we should buy Pool at its current trading price.

The leader in the pool niche market

Pool Corporation is considered the biggest swimming pool supplies and equipment wholesale distributor, operating 312 sales centers in North America and Europe. The company has three of the biggest suppliers including Pentair Water Pool and Spa (18% of the total purchases), Hayward Pool Products (11%), and Zodiac Pool Systems (8%). In the past four years, Pool has consistently generated growing sales and net income. Its top line increased from $1.54 billion in 2009 to more than $1.95 billion in 2012, while net income rose from $19.2 million, or $0.39 EPS, to nearly $82 million, or $1.71 EPS, during the same period.

Currently, there are around 80 million U.S. homes that could have space for a swimming pool, but only around 9.6 million homes have pools. Thus, according to the company, there was a huge potential growth for swimming pool equipment supplies and replacement. Its sales growth in the past two years was mainly due to the market share gain, along with the industry growth of 3% to 4%.

Looking forward, Pool expected that the industry would experience a growth rate of 4%-7% before it reverts back to the range of 3%-5% in the long run. The improvement in the housing market will help Pool in the long run. In the period of 2013-2010, U.S. new pool construction was projected to have a consistent growth, supported by the overall housing recovery. Pool is trading at around $53 per share, with a total market cap of around $2.4 billion. The market values Pool at nearly 20.6 times its forward earnings.

Fast-growing Tile Shop

Pool is quite a good stock to play the ongoing recovery in the U.S. Another two stocks that would benefit substantially from this recovery trend are Tile Shop Holdings (NASDAQ: TTS) and Home Depot (NYSE: HD). Tile Shop has been growing quite fast, operating around 70 stores in 22 states in the U.S. Shoppers can examine 60 various bathroom and kitchens vignettes in its showrooms. In the past three years, Tile Shop has consistently grown its comparable store sales. In 2012, the same store sales growth was 7.1% and operating margin was 18.8%. Interestingly, Tile Shop has managed to significantly raise its store count from 14 to 68 in the past twelve years. In the next several years, it's expected that the total number of stores could reach 130-140. Tile Shop is trading at nearly $29.70 per share, with a total market cap of around $1.52 billion. The market seems to value Tile Shop quite expensively, at nearly 44.3 times its forward earnings.

Giant home improvement retailer expects more future growth

Home Depot, one of the biggest global home improvement retailers, is operating around 2,256 stores in the U.S., Canada, and Mexico, with the total square footage of 235 million. In 2013, the company set the target of 2.8% for sales growth, with the comparable store sales growth of around 4%, leading to double-digit EPS growth of around 17%, or $3.52 per share. What makes investors interested is its commitment to maximize shareholders’ returns, including dividends and share buybacks. Home Depot targeted the payout ratio of around 50%, with the ongoing efforts to increase dividend every year. In the full-year 2013, Home Depot expected to pay a $1.56 per-share dividend , much higher than the dividend payment of $1.16 per share in 2012. Home Depot intended to repurchase up to $6.5 billion worth of its shares, creating the potential share repurchase yield of 5.8% for the year at the current trading price. At $76.60 per share, Home Depot is worth nearly $111.9 billion. The market values Home Depot at nearly 18 times its forward earnings.

My Foolish take

All three of these stocks could benefit shareholders in a long run, along with the ongoing recovery of the overall U.S. housing market. Income investors might go for Home Depot with its juiciest dividend yield among the three at 2%. Personally, I like Pool and Tile Shop because of their leading market positions. Those two businesses are positioned well in the upcoming housing boom.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Tile Shop Holdings. The Motley Fool owns shares of Tile Shop Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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