Hayward Earnings: 2023 Outlook Lowered Amid Channel Inventory Destocking and Soft End-Market Demand

We’ve lowered our fair value estimate for narrow-moat-rated Hayward HAYW to $14.20 from $14.60 following the firm’s third-quarter earnings release. Management reduced its full-year 2023 outlook and now anticipates adjusted EBITDA of $245 million-$255 million (down from $265 million-$280 million previously), which assumes a 24%-26% net sales decline (down from a 20%-23% decline previously). The fair value reduction reflects our more muted near-term revenue growth projections, partially offset by time value of money.

Hayward’s third-quarter net sales decreased by 10% from the same period last year, amid continued inventory destocking in the distribution channel and weaker end market demand due to macroeconomic uncertainty. Third-quarter volumes declined by 8% year over year, including 5% in North America and 22% in Europe and the rest of the world. Net price was also a headwind, decreasing by 3% year over year, as 5% list price increases were more than offset by higher channel rebates and dealer incentives. Hayward’s third-quarter operating margin compressed by 330 basis points year over year, from 16.4% to 13.1%, due to lower volume leverage and higher SG&A expenses, partially offset by manufacturing cost management. The price-cost spread remained neutral in third quarter.

Shares fell by roughly 8% following the earnings announcement, which we see as an overreaction as Hayward is now trading at a roughly 25% discount to our updated fair value estimate. While we acknowledge that Hayward has faced meaningful near-term headwinds, we believe that the long-term thesis remains intact as we think that the company is well-positioned to benefit from opportunities in pool automation and sustainable water solutions. We continue to expect Hayward to return to revenue growth in the mid- to high-single-digit range once channel inventory conditions normalize.