Hayward: Cheap Swimming Pools Driven By IoT Innovations (NYSE:HAYW)

IoT and swimming pools vendor Hayward Holdings, Inc. (NYSE:HAYW) delivered impressive guidance, and promised to deliver more IoT related products. As a result, I believe that future sales growth and FCF generation could increase substantially in the coming years. It is also worth noting that management recently noted that it identified several inorganic opportunities out there, which may also enhance new technological innovations. Even taking into account the total amount of debt, I believe that HAYW stock is currently undervalued.

Hayward: Geographic Diversification, Use Of The Internet of Things, And Outstanding Guidance

Hayward is a leading multinational producer of various equipment for swimming pools and water circulation systems and associated automation systems.

The company currently bases its operational potential on the growth in the placement of swimming pools due to the expansion of outdoor spaces, mainly for the offers of loose parts or services associated with the placement, such as the repair or installation of artifacts.

Hayward has global recognition and years of close relationships with its customers and employees, creating a trusted business dynamic. The company divides its operations into segments associated with its regional activities. Among these markets, Europe and the United States are the most significant, representing almost 65% of its operations with clients and 80% of its operations at the general level.

The company also offers filters, high and low performance water pumps, suction and pressure cleaners, gas and electric heaters, LED lighting solutions, water and waste management solutions, articles decoration, chlorine generators, water healers, and safety equipment. These products are connected to each other through OmniLogic, the platform that allows users to interact with the entire facility using the possibilities of the Internet of Things.

Sales are made through the company’s direct channels in the case of large distributors or wholesale stores as well as the independent sellers for more specific applications. The company’s largest client, Pool Corporation, accounted for 34% of total revenue last year. I do not really see risks from concentration of clients or anything related.

I believe that it is a great time for reviewing the company mainly because the most recent guidance was quite beneficial. Management expects sales growth for 2023, sales and general administrative expenses of savings, adjusted EBITDA close to $265-$285 million, and FCF close to $150 million.

The Increase In Net Income Appears Quite Impressive, And Market Expectations Are Beneficial

For the year ended December 31, 2022, the company reported net sales of $6.18 per share, cost of sales of $3.37 per share, and gross profit of around $2.807 per share. Besides, with selling, general, and administrative expenses around $1.17 per share, operating income stood at $1.34 per share.

The stock price is close to $10-$12 per share these days, so the company does not seem expensive. The increase in net income from 2020 is also quite impressive. We are talking about an increase in net income from $43 million in 2020 to close to $179 million in 2022.

I believe that the expectations for the future are quite beneficial. Investment advisors are expecting 2023 net sales close to $1.046 billion, 2023 EBITDA of $271 million, operating profit of $212 million, operating margin close to 20%, net income of $101 million, and 2023 FCF close to $174 million. In 2023, the numbers would include net sales of $1.223 million with 2025 EBITDA of $341 million, net income of $156 million, and FCF close to $181 million. In sum, investors are expecting FCF growth, EBITDA growth, and net income growth for the near future.

Some Investors May Not Appreciate The Total Amount Of Debt

As of December 31, 2022, the company reported cash and cash equivalents of $56.177 million, accounts receivable, net of allowances of $209.109 million, and inventories of $283.658 million. Besides, with prepaid expenses worth $14.981 million and income tax receivable of $27.173 million, total current assets stood at $612.284 million. The total amount of current assets stand at close to 3x the total amount of assets. I believe that the company does not report liquidity issues.

With property, plant and equipment worth 149.828 million, Hayward also reported goodwill of 932.396 million, trademarks worth 736 million, and customer relationships of 230.503 million. Finally, total assets stand at 2.875 billion. The asset/liability ratio stands at close to 2x. Even taking into account potential goodwill impairments, I believe that the balance sheet appears in good shape.

Among the liabilities, the company reported current portion of the long-term debt of $14.531 million, accounts payable of $54.022 million, accrued expenses and other liabilities worth $163.283 million, and total current liabilities of $232.41 million.

Long-term debt stands at $1.085 billion with deferred tax liabilities worth $264.111 million, other non-current liabilities of $70.403 million, and total liabilities of $1.65 billion.

I believe that the total amount of debt is not small, which may scare some investors. With that, most advisors are expecting an EBITDA close to $300 million in the coming years, so I believe that the leverage stands at close to 2.9x EBITDA, which is not that large for a company that delivers positive and stable EBITDA and FCF.

My Expectations Include Further Products In The IoT Market And Perhaps New Small Acquisitions

Technological innovation appears to be a great differential in the market. In Europe, the market is highly fragmented, while specific districts in the United States, such as Texas, Florida, or California, offer a greater concentration of competition than usual. With this in mind, I expect that the company, in the next seven years, will likely bring new innovative products, especially in the Internet of Things market.

Our business is primarily driven by aftermarket spending. Pool owners are increasingly demanding new technologies, such as IoT-enabled and more energy efficient products, as they replace or upgrade their existing pool equipment. In Fiscal Year 2022, new products launched in the last three years contributed approximately 16% of net sales. These new products offer higher energy efficiency, automation capabilities and enhanced water care solutions, and we expect will become primary drivers of our sales growth. Staying at the forefront of technological innovation and introducing new product offerings with new features will continue to be critical in growing our market share and revenue. Source: 10-k

Considering the growth in the IoT market, in my view, new products could bring further sales growth than expected by the market.

The global internet of things market is projected to grow from $478.36 billion in 2022 to $2,465.26 billion by 2029, at a CAGR of 26.4% in forecast period. Source: Internet of Things [IoT] Market Size, Share & Trends, 2029.

It is also worth noting that inorganic growth could be a serious driver for revenue growth. The company noted that it made four acquisitions recently, and it has new mergers and acquisitions in mind.

We continue to pursue attractive product and global geographic market opportunities to grow our presence in new markets or markets in which we have less penetration. We believe that our business can effectively address these opportunities through new product development and scalable sales, marketing, and administration. We also have and may in the future pursue acquisitions to opportunistically add product offerings or increase our geographic footprint. Source: 10-k

I believe that Hayward may have to wait a bit to present new transactions to debt holders. With that, we cannot discard very small transactions in 2023 and 2024.

DCF Model

My financial model includes a decline in net income worth $15.677 million in 2030, 2030 depreciation close to $22.606 million, and amortization of intangible assets of $33.617 million. Also, with stock-based compensation of $8.45, 2030, changes in accounts receivable of $530 million, changes in inventories of $401 million, changes in non-current assets of -$224 million, and changes in accounts payable of -$360 million, the CFO would stand at $393 million.

Besides, if we assume capex close to $56 million, 2030 FCF would be close to $336 million. Note that I am assuming FCF growth from 2023 to 2030. 2024 FCF would be close to $161 million, which is close to what the company reported in 2020 and 2021. I believe that my numbers are close to the reality.

With an EV/FCF multiple of 17x and a WACC of 7%, I obtained a net present value of future free cash flow close to $4.74 billion. With cash of $56 million and debt of $1.1 billion, the implied equity would be close to $3.7 billion. Besides, if we assume 212 million shares, the target price would be close to $17 per share.

Risks

Due to the nature of its operations, quarterly activities can vary drastically, mainly due to seasonality and weather conditions. Since the swimming pool supplies business is directly dependent on the economic conditions in each region, therefore growth in the past does not ensure growth in the future. Demand may decrease, which would lead to declines in revenue growth and stock price.

On the other hand, Hayward relies on the activity of its distributors and vendors as well as supply chains for production. Any incapacity in these activities or adverse situation in this sense could directly affect the operations of the company.

Finally, the company is exposed to risks due to operating in international markets, price fluctuations in transportation and the acquisition of raw materials, and other current risks such as risks related to its total amount of debt.

Conclusion

Hayward delivered beneficial guidance with EBITDA growth and FCF generation. The company appears to be designing new products like electric heaters, LED lighting solutions, and other products related to the IoT market revolution. In my view, new product offerings and perhaps new acquisitions in the next seven years could bring significant FCF generation. I know that there are risks out there arising from the total amount of debt, failed commercialization of products, or acquisition failures. With that, I believe that the stock could be a bit more expensive than what the stock market currently shows.