"Non-Budget Budget" - Individuals and Companies - POOL jumping in

Years ago I met with a client couple and asked them to prepare a budget, but I offered them a shortcut. I said that people spent the maximum allowed. So, rather than itemize, they could simply look at the increase in savings during the past year and that number would tell them what they had actually spent. If there were no increase in savings, then their take home income was their budget.

Because the husband was a prominent business consultant and a business school professor, he argued that my thesis might be correct in general, but certainly did not apply to them. I didn't argue because the customer is always right, but at the beginning of the next meeting he showed me a new folder titled "non-budget budget." He expressed his shock as he discovered that not only had my thesis been correct for the past year, but for the years prior as well.

In reviewing the 2021 annual report for Pool Corporation (POOL), I am reminded of how this tendency also shows up with companies. POOL has an outstanding business with "compounder" tendencies - meaning there are two or more growth areas going on. In POOL's case, there is the increasing cost of maintenance and repair as well as the increasing build out of pools driven by the migration of US citizens from North to South.

However, 2021 was eye-popping in its results. New pools, new refurbishing and updates in maintenance and repair all combined to create a strong top line growth of over 25%, while the operating leverage allowed for margin expansion and operating income to increase by close to 50%. Standing back, these results are likely to be a pull forward in demand - meaning that results will be tepid for the next few years. Ask the folks at Netflix how that feels.

An appropriate approach might be to recall the biblical practices of Joseph with the seven fruitful years. However, POOL made a sizeable acquisition by leveraging its balance sheet and likely paying top dollar for it. This pattern of "non-budget budget" of publicly traded companies shows up just as consistently as the ones I saw in individuals. Perhaps AI systems could be developed to help management with this "money burning a hole in my pants" problem.