Hayward Holdings: A Correction In The Short-Term Seems Reasonable (NYSE:HAYW)

Investment Rundown

Investing in a pool company may seem quite niched right now, and I do tend to agree with that. Hayward Holdings Inc (NYSE:HAYW) has been rather volatile over the last 12 months but ultimately displayed an increase of above 48% for the stock price. However, it seems that revenues are quite suspectable to lower demand in the housing market and the market is quite negative on the company still going forward as the short interest is at 14% right now. I don’t like the valuation of the business and think we are in for a correction very soon, resulting in a sell here as the downside amounts.

Company Segments

HAYW is a company dedicated to the design, manufacturing, and global marketing of a comprehensive range of pool equipment and advanced automation systems. Operating in North America, Europe, and various international markets, the company’s product portfolio encompasses an array of essential pool equipment such as pumps, filters, robotic cleaners, as well as gas heaters, and heat pumps. These offerings cater to the diverse needs of pool owners, providing them with efficient and reliable solutions for pool maintenance and enjoyment.

The last report from the company showcased a decline in the volumes and sales for the business. In both North America and in Europe and the rest of the world the sales decline was in the double digits on a YoY basis. This quite clearly reflects the impact that rising interest rates are having on consumer demand, mostly for the housing market. With less readily available capital for customers to spend, I think that we won’t see a quick recovery in the short term, unfortunately.

The company’s growth prospects are underpinned by several key factors, including the Sunbelt migration trend, the integration of connected smart home technologies, and the emphasis on environmentally sustainable products. As the global population ages and lifestyles evolve, the demand for pools is expected to rise significantly. In the United States alone, the market comprises approximately 5 million in-ground pools, and on a global scale, this number expands to a substantial 25 million. This presents a substantial growth avenue as pool owners seek to modernize and maintain their pools with cutting-edge IoT-enabled technologies, creating robust opportunities for expansion. Estimates for HAYW vary in the coming years, but it seems that most are anticipating double-digit EPS growth at least when the sales are still showing YoY declines I am quite concerned about the legitimacy of the estimates and the likelihood of them coming true I think gets lower each time the Fed is not cutting rates.

Value Assessment

One of the key points around my sell case with HAYW is that the valuation is right now not sustainable. The company is trading at a very rich p/s of 2.87 on an FWD basis. Being in the industrial sector and more specifically the building products industry, I would expect a p/s of around 1 – 1.5 instead for a more reasonable level. This premium is not worth paying, and without even a dividend or strong buyback program, investors are left with not a lot of value right now, unfortunately. With the last earnings report also showcasing a decline in the sales for the business I don’t think this sort of premium is justified here. There have been macroeconomic challenges like heightened interest rates, and that is true. But what is also true is that HAYW has failed in being resilient against that and therefore lacks the support to have a premium this high, I think.

The earnings estimates are quite positive for the company it seems the coming years with the EPS growing at double digits into 2026. I still don’t think that HAYW is worth the premium by 2026. Even if the interest rates fall next year I think the difficulties for HAYW may continue. The company has heavily diluted shareholders the last few years, and perhaps a bit harshly, and only really has a high debt position to show for it I think. Sales have fallen from the record $1.4 billion in 2021 when the housing market was extremely hot. The market is betting against the stock so I think it will remain suppressed for as long as shares are being diluted still. I wouldn’t pay over 12x earnings for a housing-related company like HAYW. Pool equipment won’t be in high demand if houses aren’t being built at an accelerated rate, and for the medium term, I think that will be the case unfortunately. The bottom line has been shown to lack resilience as well and NI fell 49% last quarter. The risk for a significant correction I think warrants the sell here.

Risks

In recent quarters, HAYW has encountered a reduction in sales volume, primarily driven by a decline in the demand for pool equipment and related automation systems. This decreased demand prompted its channel partners to scale back their inventory levels. It’s worth noting that the company’s revenue stream heavily relies on a handful of key customers, introducing an element of risk associated with customer concentration.

Over the past year, inflation and rising interest rates have emerged as significant economic concerns, casting a shadow of uncertainty over the economy’s stability. Notably, the US interest rate climbed, surpassing the 5% mark in June 2023. Elevated interest rates can have adverse effects on both consumer demand and borrowing costs, impacting various sectors of the economy.

Besides this, I think that the rise in short interest for the company is going to weigh on the future performance. The market is quite negative towards it and betting against the market can sometimes lead to fantastic returns, but sometimes also lead to disastrous returns. I think the risk of a correction is quite substantial here too, as the rise in recent months is leading it to trade above sector peers, even whilst posting lower sales volumes. It may be because of the last quarter’s sales coming out ahead of estimates, but looking at the bigger picture, it’s still quite negative in my view.

Final Words

HAYW is an interesting company as it more or less has its volumes driven by the climate of the housing market. A lot of construction products starting leads to more demand for HAYW and in times of lower interest rates more people have capital readily available for making purchases and investments like a pool and heaters. We have the last few years seen a significant double-digit decline in sales and I do expect this to continue for the medium term before possibly picking up when rates go lower. This leaves a large number of downside risks still and the lack of investor positive practices is making the current situation for HAYW a sell.