Warren Buffett recently made news about the stocks that Berkshire Hathaway Inc. (NYSE: BRK.B) sold. But it looks like Buffett isn’t sitting this rally out completely. On November 15, Buffett made two significant purchases in two stocks that the company had not previously owned. The stocks were Domino’s Pizza Inc. (NYSE: DPZ) and Pool Corp. (NASDAQ: POOL).
The holdings make up just a tiny fraction of the Berkshire portfolio, but much like when Buffett started buying homebuilder stocks in 2023, the moves have investors wondering what Buffett may see in a company like Pool Corporation.
According to its website, Pool Corporation, doing business as POOLCORP, is “the world’s leading wholesale distributor of swimming pool equipment, parts and supplies, and related outdoor living products.” The company’s business is divided into discretionary and non-discretionary segments. It works with designers and builders to equip new pool construction, which is a discretionary purchase. It also provides maintenance equipment for pool owners, which is non-discretionary.
Is Buffett Buying the Sales Dip?
On November 19, housing starts fell 6.9%, weaker than expected. This was partly due to the two hurricanes that ripped through the Southeast United States, particularly Florida, a key market for Pool Corp.
On the other hand, housing permits increased by just 0.5%, suggesting that the weak housing start number is likely being fueled by mortgage rates that are likely to stay higher for longer.
POOLCORP is part of the consumer discretionary stocks sector but is a housing-adjacent play for investors. Looking at the POOL stock chart, investors see a sharp move higher in 2020 and 2021. This aligned with homeowners stepping up their home improvement efforts during a global pandemic and the “great relocation,” which dispersed new homeowners into three of the company’s key markets: Florida, Texas, and Arizona.
An active hurricane season in Florida impacted POOLCORP’s quarterly sales, but that could be exactly what Buffett sees as an opportunity in the stock.
Earnings Came in as Expected
POOLCORP delivered a solid but as-expected third-quarter earnings report in October. Earnings per share (EPS) of $3.26 beat analysts' expectations for EPS of $3.15. Revenue of $1.43 billion was also ahead of expectations for $1.40 billion.
The double beat came with some caveats. First, net sales were down 3% year-over-year. The company cited the storms and subsequent cleanup in Florida as a key reason. There are times when weather can be overused to justify weak results. That's not the case with Pool.
And it’s important to note that, despite the storms, the company did see a slight 1% sales growth in Florida. It was also flat in Arizona, but sales related to pools, independent of landscaping and irrigation were positive in the state. However, the sales declines in California (-3%) and Texas (-6%) are further reminders that homeowners are still hesitant with their discretionary spending.
The company isn’t forecasting much improvement in sales for the current quarter. Nevertheless, if you believe this earnings report could reflect the worst-case scenario, POOL stock is starting to look attractive.
Checking Off Buffett’s List
Diving into POOLCORP’s balance sheet, you can see a few reasons why the company may have piqued Buffett’s interest.
- Inventory of $1.2 billion at the end of the quarter was down 6% year-over-year.
- The company reduced debt to $924 million, $110 million of debt retired in the last 12 months.
- Cash flow from operating activities came in at $489 million in 2024, with operating cash flows of 123% of net income.
- The company has conducted $159 million in total share buybacks in 2024 and still has $507 million left on its share repurchase authorization.
- It is on track to increase its dividend for the 15th consecutive year; the dividend has been growing at an average annual rate of over 23% in the last three years.
Should You Take the Plunge Into POOL Stock?
POOL stock has been trading in a confirmed range since bouncing off its 52-week low in July. And even though the stock didn’t hold the Buffett bounce, it’s attempting to gather support at a level above $350.
That’s right about where analysts have the consensus price for POOL stock. However, since the earnings report, several analysts have raised their price targets. The most significant comes from The Goldman Sachs Group Inc. (NYSE: GS), which has a new price target of $415.
It’s clear from his purchase of POOL stock that Buffett’s thinking aligns with that of Goldman Sachs. However, at first glance, this doesn’t appear to fit as a traditional Buffett buy-and-hold stock. But if you agree that the company’s sales may exceed expectations, this could be a savvy short-term trade.
The article "Berkshire Buys POOL Stock: Is It Time to Take the Plunge?" first appeared on MarketBeat.
