What Happened:
Shares of residential swimming pool manufacturer Latham (NASDAQ:SWIM) jumped 25.4% in the afternoon session after the company reported first-quarter results that blew past analysts' revenue, adjusted EBITDA, and EPS expectations. However, revenue declined in absolute terms, and this was attributed to continued difficult economic conditions, lower backlog, and normalized seasonality. The weak demand partly explains the decline in-ground pool sales, which represents its largest operating segment. Despite these challenges, management reaffirmed full-year revenue guidance, highlighting the resilience to power through the difficult demand environment. Zooming out, we think this was a great quarter that shareholders will appreciate. After the initial pop the shares cooled down to $3.69, down 0.5% from previous close.
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What is the market telling us:
Latham's shares are very volatile and over the last year have had 67 moves greater than 5%. But moves this big are very rare even for Latham and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was about 2 months ago, when the company dropped 23.9% on the news that the company reported fourth-quarter results and provided full-year revenue and EBITDA guidance that fell short of analysts' estimates as it expects more industry softness in 2024, projecting a ~15% decline in new pool installations in its markets. Despite the weakness, management noted it gained market share in 2023, especially with its fiberglass pools (fiberglass products accounted for ~73% of the company's in-ground pool sales in 2023). Adding to the positive, Latham exceeded analysts' operating margin and EPS expectations during the quarter. Zooming out, this was still a decent, albeit mixed, quarter, showing that the company is staying on track. Following the results, Bank of America downgraded the stock's rating from Buy to Underperform (Sell) and lowered the price target from $4.5 to $2.6. The new price target represents a potential 13% downside to where shares traded when the downgrade was announced.
Latham is up 48% since the beginning of the year, but at $3.69 per share it is still trading 19.1% below its 52-week high of $4.56 from July 2023. Investors who bought $1,000 worth of Latham's shares at the IPO in April 2021 would now be looking at an investment worth $135.78.
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