What happened
Shares of Latham Group(NASDAQ: SWIM) were up 9.1% on the week as of the close of trading on Thursday. The residential swimming pool manufacturer will release its third-quarter earnings on Nov. 10, and investors should watch them closely.
However, this week's move was driven more by what Latham's peers such as Pentair(NYSE: PNR) and Pool Corp(NASDAQ: POOL) have already reported. Their latest numbers offer shareholders some comfort, indicating as they do that conditions in the recreational pool market might not be as bad as the market had anticipated -- and priced into their shares.
The entire niche is seen as challenged due to rising raw material costs, weakening consumer spending, and the difficulty of overcoming tough comparisons with 2021, when stay-at-home measures boosted spending on home improvements such as pools.
Indeed, for the third quarter, Pentair reported a 4% decline in its consumer solutions sales relating to pools. The picture from Pool Corp. was mixed. As a distributor, it also benefits from offering maintenance and repair products; as such, its base business sales were up 10% in the quarter. During his company's earnings call, Pool Corp. CEO Peter Arvan noted "solid demand for non-discretionary maintenance and repair products" and "strong renovation and remodel activity."
On the other hand, Arvan also said, "we are fairly certain that new pool construction activity in 2022 will be down when compared to 2021. We would estimate that new pool construction units this year will be 10% to 15% less than the previous season."
So what
Traders have sold off stocks in this space aggressively in 2022 -- as I write, Latham Group is down a whopping 83% year to date -- so any hint of positive or even not-so-bad news is liable to drive an uptick in the share price. Still, the weakening trends in consumer spending suggest that Latham's revenue growth will come under pressure.
Now what
As Pool Corp.'s CEO noted, new pool construction is on course for a decline this year, and it's hard to predict where it will go in 2023. That's a concern for Latham Group, and it sets the company up for some potentially bad news flow in the coming quarters. As such, it's probably a stock best avoided for now.
10 stocks we like better than Latham Group, Inc.
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Latham Group, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of September 30, 2022
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Pool. The Motley Fool has a disclosure policy.
