We are downgrading our recommendation on the shares of Pool Corporation (POOL) to Underperform. We are concerned about the pace of recovery, especially in the pool construction/major renovation business.

Pool Corp.’s third-quarter earnings came in at 35 cents per share, seven cents short of the Zacks Consensus Estimate. The company reported a 13% year-over-year drop in net sales to $430.1 million. New pool construction was down sharply, and the recession is forcing consumers to cut back on expenditures. Additionally, unfavorable weather continues to negatively impact the company’s earnings.

The stressed economic conditions with high levels of unemployment, foreclosures and a slowdown in the new housing construction market have severely impacted the company’s earnings in the past several quarters. We expect this trend to continue and believe consumers will keep postponing upgrades and delaying maintenance.

Additionally, Pool Corp’s business is susceptible to weather changes. While abnormally hot and dry conditions are generally favorable to the company’s operations, abnormally cool or rainy weather patterns can adversely impact sales. The latter was the case in several of the company’s key markets during 2008. Sales were also negatively impacted in the third quarter of 2009 due to unfavorable weather in the Central and Northern U.S. markets.

Nevertheless, Pool Corp. is unquestionably the leader in the industry. The potential for market growth is also significant and the cost containment initiatives augur well. We expect the company to benefit from pent-up demand once the economic environment improves. However, we believe that an increase in demand is needed to reap the full benefits of its expense reduction efforts.

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