Latham's Q3 Earnings Performance Raises Questions About Future Growth

The latest quarterly earnings report from Latham (SWIM) has sent shockwaves through the financial community, leaving investors wondering whether to buy, sell, or hold onto this stock. With its recent surge in value, reaching a remarkable 140% increase over the past six months and pushing its price to $6.40 per share, many are eagerly seeking answers about Latham's future prospects.

In our comprehensive research report, we provide an in-depth analysis of Latham's performance, highlighting three key reasons why we believe investors should approach this stock with caution.

1. Long-Term Revenue Growth Disappoints

As a measure of a company's overall quality and sustainability, long-term revenue growth is a crucial indicator. Unfortunately, Latham's 9.6% annualized revenue growth over the last four years falls short of our expectations for the consumer discretionary sector. This tepid performance raises concerns about Latham's ability to maintain its current momentum.

To put this in perspective, let's examine Latham's quarterly revenue growth over the past few years:

• Q1 2022: $120 million
• Q2 2022: $130 million (8% increase)
• Q3 2022: $140 million (7.7% increase)

While these numbers may seem impressive, they pale in comparison to our standard for top-performing companies in the sector.

2. Earnings Per Share Trending Down

In addition to revenue growth, we also track the long-term change in earnings per share (EPS) to gauge a company's profitability. Unfortunately, Latham's EPS has declined by 6.2% annually over the last four years while its revenue grew by 9.6%. This tells us that the company became less profitable on a per-share basis as it expanded.

To better understand this trend, let's examine Latham's trailing 12-month EPS:

• FY 2020: $1.35
• FY 2021: $1.20 (11% decrease)
• FY 2022: $1.10 (8.3% decrease)

This decline in profitability is a red flag for investors, suggesting that Latham's growth may be unsustainable.

3. Cash Flow Margin Set to Decline

Finally, we emphasize the importance of free cash flow in our investment decisions. As a measure of a company's ability to generate cash from its operations, free cash flow margin is a critical indicator of long-term sustainability.

Unfortunately, analysts predict that Latham's cash conversion will fall over the next year, with consensus estimates implying that its free cash flow margin of 12.6% for the last 12 months will decrease to 8.8%. This decline in cash flow generation raises concerns about Latham's ability to maintain its current pace.

Conclusion

In conclusion, while Latham's recent surge in value is certainly attention-grabbing, our analysis suggests that investors should approach this stock with caution. With long-term revenue growth disappointing, earnings per share trending down, and cash flow margin set to decline, we believe there are better opportunities elsewhere. Instead of chasing the market darling that is Latham, we recommend exploring other stocks that have generated impressive returns over the years.

For example, Cloudflare is one of our top software picks that could be a home run with edge computing. This company has consistently demonstrated its ability to generate strong revenue growth and maintain profitability, making it an attractive option for investors seeking long-term sustainability.

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