Latham Group Inc. (SWIM) in Latham, N.Y. is the largest designer, manufacturer, and marketer of in-ground residential swimming pools in North America, Australia, and New Zealand. The company is continuously improving its operational performance through strategic initiatives, such as using its unique direct-to-homeowner digital strategies to create leads for its dealer partners and managing supply chain and raw material-related challenges.

However, the stock has declined 19.6% in price over the past month. Closing yesterday’s trading session at $20.20, SWIM is currently trading 41.8% below its $34.73 all-time high, which it hit on May 18, 2021.

The stock plunged last week after SWIM announced the initiation of a public offering of 12,000,000 shares of its common stock at $19.50 per share. The company intends to use the proceeds to purchase an equivalent number of shares of common stock primarily from its principal stockholders, who are affiliates of Pamplona Capital Management, LLC and Wynnchurch Capital, L.P., and a small percentage of the shares owned by the company’s directors and executive officers. SWIM will also provide the underwriters a 30-day option to purchase an additional 1,800,000 shares of its common stock.

Here is what could shape SWIM’s performance in the near term:

Strategic Acquisitions

Last November, SWIM acquired Radiant Pools for roughly $90 million. The acquisition broadens SWIM’s product offering to include vinyl-lined, aluminum-walled swimming pools, which are a cost-effective way for consumers to create the perfect backyard experience and offers solutions for a variety of backyard pool applications.

Mixed Financials

SWIM’s revenue increased 27% year-over-year to $161.96 million for its fiscal third quarter, ended Oct. 02, 2021. Its cash and cash equivalents grew 53.2% for the nine months ended Oct. 02, 2021, to $90.87 million.

However, its loss from operations was $2.57 million, versus $26.17 million in operating income in the prior-year quarter. The company reported a $11.29 million net loss, versus $17.74 million in net income in the third quarter of 2020. Its loss per share amounted to $0.10, compared to EPS of $0.18 in the prior year.

Poor Profitability

SWIM’s 1.65% trailing-12-months EBITDA margin is 87.1% lower than the 12.8% industry average. Also, its ROA and net income margin are negative 8.1% and 9.8%, respectively. And its $37.53 million trailing-12-months cash from operations is 79.6% lower than the $183.7 million industry average.

Premium Valuation

In terms of forward EV/Sales, the stock is currently trading at 4.49x, which is 217.8% higher than the 1.41x industry average Also, its 6.86X forward Price/Book is 104.5% higher than the 3.36x industry average. And SWIM’s 4.34x forward Price/Sales is 264.5% higher than the 1.19x industry average.

POWR Ratings Reflect Uncertainty

SWIM has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SWIM has a D grade for Value and a C for Quality. The company’s higher-than-industry valuation is in sync with the Value grade. In addition, SWIM’s mixed financials and poor profitability are consistent with the Quality grade.

Of 37 stocks in the B-rated Athletics and Recreation industry, SWIM is ranked #31.

Beyond what I have stated above, one can view SWIM ratings for Stability, Momentum, and Sentiment here.

Bottom Line

Despite facing significant supply chain and raw materials-related challenges, the company recorded strong revenue in its fiscal third quarter. However, analysts expect its EPS to decline 18.2% in the next quarter (ending March 2022). In addition, the stock is currently trading below its 50-day and 200-day moving average of $22.43 and $21.65, respectively, indicating a downtrend. So, we think it could be wise to wait before scooping up its shares.

How Does Latham Group Inc. (SWIM) Stack Up Against its Peers?

While SWIM has an overall C rating, one might want to consider its industry peers, Columbia Sportswear Company (COLM), Johnson Outdoors Inc. (JOUT), and OneWater Marine Inc. (ONEW), which have an overall B (Buy) rating.

Note that COLM is one of the few stocks handpicked by our Chief Value Strategist, Steve Reitmeister, currently in the POWR Value portfolio. Learn more here.

SWIM shares were unchanged in premarket trading Thursday. Year-to-date, SWIM has declined -19.10%, versus a -0.57% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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