Diving Into Pool Corp.

Pool's biggest use of cash is investment in working capital, especially inventory.

While the obsolescence risk for products like chlorine and pumps seems remote -- crucially, management has yet to write off any inventory buildups from prior years -- the extra assets can strain the right side of the balance sheet.

Pool's interest-bearing debt stands at $307 million as of June 30, 2006, versus $175 million on June 30, 2005. As a result, net debt is 1.8 times tangible book, versus 0.8 times a year ago.

Because balance-sheet strength is a competitive advantage, especially if we have a recession, I'd like to see Pool pay down its debt and stockpile cash.

The Earnings Power chart shows that the company is unable to stay in the desirable upper-right box every year, despite its impressive GAAP results.

Pool: Earnings Power Chart The company can't remain in the upper-right box.

In contrast, look at Garmin's (GRMN - commentary - Cramer's Take) Earnings Power chart below. The navigation-equipment maker not only is in the upper-right box every year, but also is moving in an upper-right direction to forge what I call an Earnings Power Staircase. That is a hallmark of conservative growth: The company is getting bigger as well as better.

Garmin: Earnings Power Chart It illustrates the contrast with Pool.

The Insider Argument

Let's take another look at the insider buying at Pool. While board chairman Wilson Sexton recently bought $180,000 of stock, he has sold $1.9 million worth since March 2005, according to Form 4 Oracle. So he doesn't seem to be making a big bet in relation to his potential buying power.

Also, given that Pool is such a small company, I expected a higher level of insider ownership, at least 15% to 20% of the total. But the latest proxy shows executives and directors own just 7.7% of the company, of which 60% are option grants.

I am neutral on Pool. It lacks earnings power in the broadest possible sense, and it's simply not a cheap enough stock.

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At the time of publication, Heiserman had no positions in any of the stocks mentioned in this column, although holdings can change at any time.

Hewitt Heiserman conceived the Earnings Power Chart and the Earnings Power Staircase. A graduate of Kenyon College with distinction in history, Heiserman is a member of the Boston Security Analyst Society and the CFA Institute. He also authored It's Earnings That Count. For additional information, please visit www.earningspower.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback; click here to send him an email.

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