Latham Group (SWIM): Accounting Anomalies Mask a Strongly Valued, Secular-Growth Play

In the world of value investing, the line between noise and signal often hinges on the ability to discern operational strength from accounting distortions. Latham Group (SWIM), a leading player in the residential pool and spa industry, presents a compelling case where GAAP earnings may understate the company's intrinsic value. While Q3 2025 results fell short of expectations-GAAP earnings per share of $0.07 versus the forecasted $0.10-the broader narrative reveals a business leveraging secular tailwinds, strategic acquisitions, and margin expansion to position itself as a high-conviction growth opportunity according to market analysis.

Accounting Anomalies and the GAAP-Adjusted EBITDA Divide

Latham's Q3 2025 earnings miss was overshadowed by a 28.5% year-over-year increase in adjusted EBITDA to $38.3 million, outpacing analyst estimates. This divergence underscores the importance of reconciling GAAP metrics with non-GAAP adjustments. The company's 7.6% year-over-year revenue growth, driven by the acquisition of Coverstar and organic volume expansion, highlights how inorganic contributions (approximately $5 million in quarterly sales from acquisitions) and tariff-driven price increases distort GAAP comparisons according to Seeking Alpha. While GAAP earnings reflect short-term volatility, adjusted EBITDA margins expanded to 23.7%, a 390-basis-point improvement from the prior year. This suggests that Latham's operational efficiency and strategic focus on high-margin fiberglass pools-now 75% of in-ground sales-are normalizing earnings despite macroeconomic headwinds.

Secular Tailwinds: Fiberglass Pools and Sunbelt Expansion

The pool industry is undergoing a structural shift toward fiberglass and automatic safety covers, a trend Latham is capitalizing on. Fiberglass pools now account for 23% of total U.S. installations, up 600 basis points since 2019, with Latham holding 50% of the North American fiberglass market. This segment's durability and lower maintenance costs align with consumer demand for long-term value, a critical differentiator in a post-pandemic economy.

Geographically, Latham's expansion into the "Sand States"-particularly Florida-has been a tailwind. Sales in these regions grew at a high-single-digit rate in Q3 2025, driven by demographic shifts and housing market dynamics. The company's recent acquisitions in the automatic safety cover market (Coverstar Central, New York, and Tennessee) further diversify its revenue streams, addressing safety regulations and premium pricing opportunities.

DCF Analysis and Margin Expansion: A Case for Undervaluation

Discounted cash flow (DCF) models suggest Latham is significantly undervalued. A two-stage DCF analysis estimates a fair value of $8.68 per share, implying a 24.5% upside from the current price of $6.97. Another valuation places intrinsic value at $9.63, with the stock trading at a 19% discount according to Yahoo Finance. These figures hinge on projected margin improvements: gross margins expanded 300 basis points in Q3 2025 to 35.4%, and analysts forecast profit margins to rise from -2.5% to 5.1% by 2027.

The drivers of this margin expansion are clear. Lean manufacturing initiatives, value engineering, and a shift toward high-margin products (fiberglass pools carry higher gross margins than concrete alternatives) are accelerating profitability. Additionally, Latham's $70.5 million in cash and strong EBITDA generation provide flexibility to manage its 3.0x net debt leverage ratio according to the company's earnings release. While housing market risks and interest rate volatility persist, the company's secular positioning in a $5 billion U.S. pool market mitigates these concerns.

Risks and the Path Forward

No investment thesis is without caveats. Latham's reliance on discretionary spending makes it sensitive to housing market downturns, and its debt load could constrain growth in a high-rate environment. However, the company's strategic focus on fiberglass-a segment growing at 10% annually-offsets these risks. With 23% of total pool installations now fiberglass, Latham is not merely riding a trend but reshaping it.

For value investors, the key takeaway is clear: Latham's GAAP earnings may obscure a business with robust secular momentum, margin resilience, and a compelling DCF-based valuation. As the company continues to normalize earnings through operational discipline and market share gains, the current price offers a margin of safety for those willing to look beyond quarterly volatility.