Pool Corporation (POOL)

Overview

This report presents a discounted cash flow analysis for Pool Corporation (POOL), a prominent entity within the Industrials sector. The valuation employs a Free Cash Flow to Equity (FCFE) methodology, projecting cash flows over a ten-year explicit forecast horizon. The analysis culminates in an estimated equity value per share, which is then compared against the prevailing market price.

Macro Preamble

The macroeconomic environment influencing this valuation is characterized by a 10-year U.S. Treasury yield of 4.40% as of April 30, 2026. The Federal Funds Rate stood at 3.64% on the same date, while the 10-year minus 2-year Treasury spread was 0.51%. These rates inform the risk-free rate component within the cost of equity calculation, reflecting current market conditions for long-term, risk-free investments.

WACC build-up

WACC Discussion

The Weighted Average Cost of Capital (WACC) employed in this analysis is 9.27%. This rate is derived from a cost of equity of 10.27% and a post-tax cost of debt of 4.43%, weighted according to the company's target capital structure. The cost of equity utilizes a risk-free rate of 4.40% and an equity market risk premium of 5.00%. The raw beta of 1.262 was adjusted to 1.175 using the Blume adjustment method, then unlevered and re-levered to reflect the target debt-to-equity ratio of 17.07%. The tax rate applied in the post-tax cost of debt calculation is 25%, consistent with the unlevered tax calculation within the FCFE. This WACC reflects the required return for a company with Pool Corporation's risk profile and capital structure.

Forecast — unlevered free cash flow

Forecast Rationale

The explicit forecast period spans ten years, concluding in 2028. Revenue projections for Pool Corporation indicate a period of contraction through 2027, with a growth rate of -7.00% in 2026 and -2.25% in 2027, before returning to positive growth of 2.50% in 2028. This trajectory reflects a normalization following periods of significant volatility, as evidenced by the -26.01% growth in 2022 and -21.26% in 2023. EBITA margins are projected to stabilize around 9.29% by the end of the explicit forecast period, having fluctuated from a high of 13.24% in 2021 to 9.65% in 2026. Free Cash Flow to Equity (FCFE) is calculated as EBITA plus depreciation, less capital expenditures, less the change in net working capital, and less unlevered tax, ensuring that interest tax shields are not double-counted.

Terminal value & enterprise value

Terminal Value Discussion

The terminal value, representing the present value of all cash flows beyond the explicit forecast period, is calculated using the Free Cash Flow Perpetuity Growth Model. This method assumes that Free Cash Flow to Equity will grow at a constant rate indefinitely after the explicit forecast period. A long-run growth rate (g) of 2.50% has been applied, which is strictly less than the calculated WACC of 9.27%, satisfying a critical methodological constraint. The undiscounted terminal value is estimated at $2,115 million, which, when discounted back to the valuation date, contributes $911 million to the enterprise value. This approach assumes a stable, mature business operating in perpetuity, with reinvestment rates supporting the perpetual growth.

EV → equity bridge

EV → Equity Bridge Discussion

The enterprise value (EV) derived from the discounted explicit cash flows and terminal value is $2,750 million. To bridge this to equity value, net debt of $1,527 million is deducted. The analysis currently assumes no material pension deficit, operating lease liabilities, or minority interests requiring adjustment. Furthermore, no value for equity-accounted joint ventures or associates has been included, as this data was not supplied for the current run. The resulting equity value is $1,223 million.

Sensitivity — implied share price (WACC × g)

Sensitivity Discussion

The valuation is inherently sensitive to key assumptions, particularly the terminal growth rate and the Weighted Average Cost of Capital. A minor alteration in either of these parameters can lead to a significant change in the implied equity value. Given the terminal growth rate of 2.50% is well below the WACC of 9.27%, the model exhibits less immediate sensitivity to the 'g' assumption compared to scenarios where 'g' approaches WACC. Nonetheless, careful consideration of these inputs is paramount, as they exert substantial influence on the final valuation output.

Quality checks

• PASSNominal cash flows discounted with nominal WACCEngine applies nominal Rf and nominal growth throughout; no inflation adjustment is mixed in.
• PASSNo interest tax shield added to FCFE (avoid double-count with post-tax Kd)Tax in FCFE = tax × EBITA (unlevered tax). Tax shield is captured exclusively in WACC via post-tax Kd.
• PASSSame target D/(D+E) used for WACC weights and beta re-leveringEngine de-levers existing β at 17.1% then re-levers and weights WACC at 17.1%.
• REVIEWJV consolidation consistent (equity-accounted → add back; proportional → no add)JV value not supplied; engine assumes zero. Confirm consolidation policy.
• PASSSame EBITDA basis used for explicit period and exit multipleNot applicable (TV method is not exit-multiple).
• REVIEWDiluted share count is rolled forward to as-of dateEngine uses the most recent published diluted share count; analyst should confirm post-period buybacks/issuance.
• PASSTerminal growth strictly less than WACCg = 2.50% vs WACC = 9.27%

Key Risks & Review Items

Several items warrant further review to enhance the robustness of this valuation. The consolidation policy for joint ventures should be confirmed, as the model currently assumes a zero value for JV associates. Additionally, the diluted share count utilized is based on the most recent published figures; any post-period buybacks or issuances should be verified by the analyst. The significant projected decline in revenue growth over the initial explicit forecast years represents a key operational risk to the company's future cash flow generation.

Closing Note

This discounted cash flow analysis provides a quantitative framework for assessing the intrinsic value of Pool Corporation. The results are predicated upon the detailed assumptions outlined herein and should be considered within the broader context of qualitative factors and market dynamics. This report does not constitute investment advice.