Why Pool Corp Stock Could Be the Cool Play in a Hot Summer

Key Points

• Pool is down a little bit right now, as the economy has made it tougher for people to sink tens of thousands of dollars into building new swimming pools.

• However, only 14% of its business comes from the installation of new swimming pools.

• Pool doesn't need a huge market of new construction to be successful.

• 10 stocks we like better than Pool ›

Few things are as sweet as resting by the swimming pool on a hot summer day. The cool, refreshing water, the faint smell of chlorine, the warm sun on your face, a cool beverage in your hand -- it's always a good day when you're at a good swimming pool. What's the only thing that could make it better? How about knowing that your investment in a solid stock like Pool Corp (NASDAQ: POOL) will likely make you richer in the long run?

Pool is down a little bit right now, as the economy has made it tougher for people to sink tens of thousands of dollars into building new swimming pools. But that's OK for two reasons. First, Pool is still a money-printing machine, even in a volatile economy. Second, one day the pool business will be a good one, and Pool stock will start climbing again. When that happens, you will be glad you bought this stock while it was on sale.

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So, whether you're a short-term investor or have a long-term horizon, Pool is a buy for me right now. That's why I call it one of my best stocks to buy on the dip and hold.

Image source: Getty Images.

How Pool is making money now

Pool distributes and sells outdoor equipment, but it's best known for selling replacement parts and equipment for swimming pool installations. The company has more than 200,000 products and a network of over 2,200 suppliers working in the United States, Europe, and Australia.

More than 80% of its customers are builders or service professionals, although the company also has a retail business that accounts for 14% of its revenues. And most importantly, 64% of its business -- nearly two-thirds -- comes from maintenance and repair product sales. Only 14% of its business comes from the installation of new swimming pools.

That's an important point right now: Pool doesn't need a huge market of new construction to be successful.

And it's doing well. After seeing revenue dip on a year-over-year basis in the first quarter, Pool issued its Q2 earnings report on July 24. Revenue of $1.78 billion was up nearly 1% from the same quarter a year ago. Net income of $194 million and earnings per share (EPS) of $5.17 were up 1% and 3.5%, respectively, from last year. Pool also maintained its 30% profit margin, the same as a year ago.

The company, which says it expects tariffs and inflation to increase its prices by 2%, has slightly revised its guidance downward, now stating that full-year revenue will be flat compared to its previous guidance of flat to slightly up. It's projecting EPS of $10.80 to $11.30 versus a previous range of $11.10 to $11.60.

Why I like Pool even with lowered guidance

For long-term investors, I think Pool is a slam-dunk pick. I love getting stocks when they're on sale, and Pool is down more than 4% this year (although it did jump by 3% after the company issued its earnings report on July 24).

However, this is a solid company with a steadily growing dividend and a cash position that increases each year. Pool paid out $92.2 million in dividends in the first half of the year and executed $160.6 million in stock buybacks in the first two quarters of the year.

POOL Cash and Equivalents (Annual) data by YCharts.

That's perhaps one reason why Berkshire Hathaway, which is headed by the famed buy-and-hold investor Warren Buffett, added Pool stock to its portfolio last year. Buffett and his team never buy on a whim and he has famously said his favorite stock holding period is forever, so you know Berkshire's in for the long haul. This is a stock that pays you to hold it. It's perfect for short-term income investors looking for ways to juice their portfolio or get some extra income from their holdings, or for long-term investors seeking a set-it-and-forget-it stock.

The bottom line on Pool

This isn't a blazing hot stock that's going to set your portfolio on fire. But it's not going to leave you flat either.

Instead, Pool is a solid, undervalued income stock that is going to look like a bargain soon. And Wall Street is just starting to figure that out, as the stock started to move upward after the company's Q2 report.

If you're looking to take a position in Pool, an ideal strategy would be dollar-cost averaging -- dividing your investment into four equal amounts and adding to your position over a set period of time, thereby eliminating the risk of short-term volatility.

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Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.