Hayward Holdings: Initiating Coverage With a $14 Fair Value Estimate and Narrow Moat Rating

We are launching coverage of Hayward HAYW, a pure-play swimming pool equipment company, with a $14 fair value estimate, narrow moat rating, and Standard capital allocation rating.

We believe that Hayward has carved a narrow moat attributable to customer switching costs and intangible assets. Hayward derives nearly 80% of its revenue from aftermarket service and replacement parts, which are tied to its large installed base of equipment. We believe that Hayward is well positioned to continue increasing the value of its content per pool pad by offering automation solutions, energy-efficient products, and software-enabled devices. We estimate that the content opportunity on smart pool pads can be 3 times higher than in legacy swimming pools. Furthermore, we think that connected solutions have the potential to reinforce switching costs in the pool business as we believe that offering an ecosystem that integrates multiple Hayward products and allows customers to remotely monitor and control their pools will enhance customer loyalty.

Hayward faces short-term headwinds as volumes revert to normalized levels following record sales during the pandemic. For full-year 2023, management anticipates sales to be down by 18% to 22% from the previous year. Although volumes will be pressured by the inventory correction in the residential channel, we expect the company to return to more normalized growth in 2024. In the long run, we expect Hayward to grow its revenue at a mid- to high-single-digit clip, as we expect the pool business to benefit from migration to the suburbs and population growth in the Sunbelt. Furthermore, we believe that Hayward is poised to continue increasing the value of its content per swimming pool pad thanks to its complete portfolio of upgrade-oriented products, including energy-efficient products and automation solutions.