On Monday, BofA Securities updated its outlook on Latham Group Inc. (NASDAQ: SWIM), raising the price target to $5.30 from the previous $4.90 while maintaining an Underperform rating on the stock. The adjustment reflects a change in the valuation multiple, with the new target based on approximately 9.0 times the estimated 2025 enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), an increase from the prior 8.5 times multiple.
The firm's analysis pointed out that states such as Florida, Texas, Arizona, and California, referred to as the sand states, represented around 67% of the industry's new pool starts in 2023. However, these regions only accounted for about 15% of Latham Group's fiberglass pool sales. The company aims to enhance fiberglass pool market penetration in these states through expanding installation capacity and boosting consumer awareness.
Latham Group's strategy includes converting concrete pool dealers to fiberglass, adding new dealers, and improving the productivity of existing dealers. Fiberglass pools offer dealers benefits such as faster installation times, higher profitability due to reduced labor, and greater scalability. For consumers, the company is marketing the long-term cost savings, reduced maintenance, and quicker installation time associated with fiberglass pools.
The company is also targeting Master Planned Communities, where marketing efforts can be more effectively scaled and a significant number of homeowners typically install pools within the first 18 months of home construction. Despite the strategic initiatives, the analyst noted that the upfront cost of concrete pools in the sand states could pose a challenge to increasing fiberglass penetration, as they require less material compared to other regions, making their initial cost competitive with fiberglass pools.
BofA Securities has expressed caution regarding the stock, citing expectations for a muted recovery in 2025 and uncertainties surrounding the timeline for achieving increased market penetration of fiberglass pools in the targeted states.
In other recent news, Latham Group, North America's largest in-ground pool manufacturer, reported its Q3 2024 results, showing a decrease in net sales by 6.4% year-over-year to $150.5 million. The company's gross margin, however, saw an improvement, attributed to cost reduction initiatives. The acquisition of Coverstar Central is anticipated to boost net sales and enhance adjusted EBITDA margins.
The company has also narrowed its full-year guidance, expecting net sales to fall between $500 million and $510 million and adjusted EBITDA to range from $77 million to $83 million. Despite a challenging market, Latham Group remains focused on growth opportunities, particularly in the outdoor living category and the "Sand States."
The company is also investing in sales, marketing, and product development to capture market share when market conditions improve. Latham Group's future optimism is contingent on improved consumer confidence and potential reductions in interest rates.
InvestingPro Insights
Latham Group Inc. (NASDAQ: SWIM) has shown remarkable resilience in the face of market challenges, as evidenced by recent InvestingPro data. The company's stock has demonstrated significant momentum, with a 185.89% price total return over the past year and an impressive 85.22% return in the last six months. This performance aligns with the InvestingPro Tip highlighting the "high return over the last year" and suggests that investors have been responding positively to the company's strategic initiatives, including its efforts to expand in key markets like Florida, Texas, Arizona, and California.
Despite BofA Securities' cautious stance, InvestingPro data reveals that Latham Group's PEG ratio stands at 0.47, indicating that the stock may be undervalued relative to its growth prospects. This is further supported by an InvestingPro Tip stating that the company is "trading at a low P/E ratio relative to near-term earnings growth." This valuation metric could be of particular interest to investors considering the company's expansion plans and potential for increased market penetration in the sand states.
For readers seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for Latham Group, providing a deeper understanding of the company's financial health and market position.
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