Pool has been treading water for the past six months, recording a small return of 4.5% while holding steady at $362.12.

Is now the time to buy Pool, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

We don't have much confidence in Pool. Here are three reasons why you should be careful with POOL and a stock we'd rather own.

Why Is Pool Not Exciting?

Founded in 1993 and headquartered in Louisiana, Pool (NASDAQ:POOL) is one of the largest wholesale distributors of swimming pool supplies, equipment, and related leisure products.

1. Core Business Falling Behind as Demand Declines

In addition to reported revenue, organic revenue is a useful data point for analyzing Specialized Consumer Services companies. This metric gives visibility into Pool’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Pool’s organic revenue averaged 8% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Pool might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict Pool’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 11.3% for the last 12 months will decrease to 7.5%.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Pool’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Pool isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 30.7× forward price-to-earnings (or $362.12 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. Let us point you toward an all-weather company that owns household favorite Taco Bell.

Stocks We Like More Than Pool

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