Hayward Stock: Nice Risk/Return Opportunity (NYSE:HAYW)

Investment Thesis

I believe that the firm has a strong fundamental offering to capture attractive growth opportunities. With a forward PE ratio of 10.27, I think the stock is a buy.

Introducing Hayward

Hayward offers a wide range of pool equipment and automation systems. According to the latest annual report, its portfolio includes:

• Single and high-efficiency variable speed pumps
• Filters,
• Robotic
• Suction and pressure cleaners
• High-efficiency gas heaters and heat pumps
• LED illumination solutions,
• Water features and landscape lighting
• Water sanitizers, salt chlorine generators
• Safety equipment
• In-floor automated cleaning systems.

Its mobile application enables its users to manage their linked pool equipment.

Industry Outlook

I believe that technological advancements is one of the main drivers in the pool equipment and maintenance market. Both high-quality materials and affordable prices have resulted from technological advancements. It is now simpler than ever to supply clean energy for heating swimming pools causing much less environmental harm. Furthermore, energy-efficient features result in cost savings. Other industry trends are improved water saving, less chemical use, improved IoT-driven pool experiences, and improved sanitization. I believe that all these features will increase demand for both pools and pool equipment and thus boost the market expansion nicely.

According to Market Data Forecast data, the pool equipment and maintenance market is projected to grow at a CAGR of 11.7%, reaching a value of 19.51 billion USD in 2027.

Competition

Hayward competes against large and well-established national and global companies, as well as regional and local niche original equipment manufacturers. One of its closest competitors is Pentair.

Company	Business Description	Market Cap	Last Year’s Revenue Growth
Hayward (NYSE:HAYW)	Hayward offers a broad range of pool equipment and automation systems.	2.55B	60.13%
Pentair (PNR)	Pentair, a company with 10,000 people and a presence in 25 countries, is a leader in the water treatment sector on a global scale. Consumer solutions and industrial and flow technologies make up Pentair’s two business areas. The company offers a comprehensive selection of water treatment alternatives, including pumps for commercial and industrial use, filtration systems, and energy-efficient pool equipment.	8.04B	24.75%

Source: Morningstar and Seeking Alpha

Competitive Position

Since its founding in 1925, Hayward has had a long time to grow its product range, distributor and supplier network, and brand awareness.

As according to its latest annual report the company sells mostly to distributors, I believe that offering a broad product range is an advantage to its customers who most probably desire a supplier who can get them almost any type of pool equipment.

I believe that another one of the strengths of Hayward is its strong relationships with suppliers. In the latest annual report, the company states that:

We have had an average relationship of over 15 years across our top 30 suppliers. We have had a 40+ year relationship with our top vendor and 10+ year relationships with 9 out of our top 10 suppliers, with an average of 19 years of supply continuity. These top 10 suppliers represent approximately 35% of our total material purchases.

The quality of its supplier network could potentially lead to advantages related to the lowest costs, flexibility in production, as well as supply-risk reduction.

Hayward also claims in its latest annual report that its products are characterized by advanced features:

Our more environmentally sustainable products provide increased value for pool owners through various advanced functions that help drive energy savings, minimize chemical usage and reduce water consumption. Given these advanced functions, we are able to charge a higher price on key products such as variable speed pumps, energy efficient heaters, efficient filters and LED lights. The addition of IoT based controls and alternative sanitizers, including salt chlorination systems and UV/Ozone systems, also increases the potential equipment spend on a pool pad while providing greater ease of use for pool owners and potential energy savings and chemical reduction.

Many of these features are essential to capture key industry trends, making it a solid product, in my eyes.

To see how users rate its products, I did some research on pool (equipment) communities. The battle seems to be mostly between Hayward and Pentair. Jandy receives some mentions as well. I find that both Hayward and Pentair are the most mentioned and respected brands when looking for the best pool equipment (Source 1, Source 2, Source 3). However, people seem to rate Pentair a bit higher.

Overall Hayward seems to possess some solid competitive strengths.

Valuation and Financial performance

Basic statistics comparison:

index	Forward PE	Gross Margin	Free Cash Flow Margin	3Y sales growth	3Y EPS growth	Debt / Equity
Hayward	10.27	50.48%	6.93%	–	–	0.93
Pentair	12.8	33.69%	8.83%	8%	21%	0.36

Source: Seeking Alpha

As there aren’t 4 years of accounting data public for Hayward, the 3-year growth couldn’t be computed. The company however doubled its revenue and gross profit since 2019. Its EPS of 0 in 2019 increased to 0.19 in 2020 and 0.49 in 2021, showing great EPS growth. Furthermore, its gross margin is superior to that of its competitor Pentair.

Related to the most recent quarterly earnings, the CEO said:

We delivered another solid quarter marked by net sales growth of 10% year over year to $399 million, which was on top of exceptional growth of 66% in the second quarter of 2021. In our core North American market, net sales increased 17%. Adjusted EBITDA in the second quarter grew 16% year over year to $128 million, yielding a 32% margin. This represents an increase of 166 basis points over the prior-year level despite the sustained inflationary headwinds.

While this confirms its strong recent performance, there are also headwinds to be expected. A decline in Europe sales is expected in 2022 caused by current macro-economic factors. Furthermore in Northern America, economic uncertainty, unfavorable weather as well as supply chain/logistic constraints result in a projected 2 to 6 percent decrease in sales for 2022.

Nevertheless, the confidence of the company in continuing its strong financial performance in the coming years is evidenced by reloading its 450 million USD stock repurchase program over three years.

Final Take

I believe that the Hayward takes advantage of its strong networks as well as a respected product which offers many advanced features. The company performed financial very well in recent times. However, some headwinds are expected. Nevertheless, with its fundamental offering combined with attractive growth opportunities, I believe that a forward PE of 10.27 is a nice buying opportunity for the long term.