Swimming Pools and the Americans with Disabilities Act: A $1 Billion Market Opportunity
While investors often bemoan government regulations that impair a company’s operations or distort the marketplace, such rules occasionally afford the opportunity to profit from those companies whose products or services enable compliance. At the very least, it can be a useful mental exercise for investors to sort through which entities stand to gain from burdensome regulations.
In recent months, there have been numerous articles in the media about onerous new federal regulations regarding handicapped accessibility of public pools. While there are several ways in which a public pool can comply with these new regulations, including sloped entries and stairs, most existing pools will likely opt to install handicap lifts since they don’t require structural modification. While handicap lifts may be cheaper than adding a sloped entry to an existing pool, they’re still an expensive upgrade. The cost of handicap lifts ranges from $3,100 to $7,000, with installation adding another $1,500 to $4,000.
According to data from the Association of Pool & Spa Professionals (APSP), the total installed base of US commercial pools was 309,000 in 2011. If one assumes that none of those pools are in compliance, then the resulting expenditure on handicap lifts alone quickly becomes staggering, with a range between $1 billion and $2 billion.
Background on the New Regulations
But first some additional nuance is in order to better understand whether there truly is an investment opportunity here.
In the past, the Americans with Disabilities Act (ADA) merely required swimming pools to include a handicapped-accessible route to reach the pool, but did not mandate any system for actually getting into the pool. In July 2010, the Justice Department issued an expansive interpretation of the ADA’s “Standards for Accessible Design” that required public spas and swimming pools to provide one or two means of entry depending upon their size. Pools that have less than 300 linear feet of pool wall must have at least one means of access for the handicapped, while pools that have more than 300 linear feet of pool wall must provide at least two means of access for the handicapped.
The initial deadline for compliance was March 15 of this year, but following industry blowback, the deadline was revised to May 21. However, the Justice Department has solicited public comment on whether that deadline should be postponed an additional six months.
The enforcement process for ADA regulations is largely complaint-driven. While local government authorities will occasionally exercise oversight on ADA compliance, the federal government largely relies on individual citizens, advocacy groups, and lawyers to compel enforcement by bringing violations to their attention or filing a lawsuit. That’s led some conservative commentators to decry the latest rule as a sop to the trial lawyers lobby.
Industry Groups Are Stalling for Time
Additionally, industry associations such as the American Hotel and Lodging Association have been frantically lobbying to amend these rules, successfully garnering key support from members of Congress. On March 12, Republican Sen. Jim DeMint of South Carolina introduced a bill that would preclude the federal government from enforcing these new regulations. Then on March 26, Representative Mick Mulvaney (R-S.C.) introduced a bill that would provide a one-year extension for compliance and allow portable lifts to be shared among pools in those facilities that have multiple vessels. The potential for additional delays or legislation that alters the rules could mean that pool operators defer their purchases until there’s greater clarity.
And operators of existing pools have one other potential means of deferment courtesy of the regulations’ use of the phrase “readily achievable.” If pool operators don’t have money in their budget to make compliance readily achievable this year, then all they need to satisfy the new regulations is a written plan on file that states their intent to allocate money for a lift in next year’s budget.
How Many Pools Actually Need to Be Compliant?
And while there are roughly 309,000 public pools in the US, there are varying estimates as to the subsets that would need to meet these new standards, as well as how many may already be in compliance. We spoke with Steven Getzoff, the outside national counsel for the APSP, who clarified that statistic further. There are about 85,000 public pools in the hotel and lodging industry, with one-third estimated to have spas whose vessels would also fall under the new rules. And there are about 115,000 public pools maintained by parks, schools, and local government. The remaining public pools, which are in clubs or maintained by apartments as well as condominium and homeowners’ associations, fall outside the scope of the new rules. So that means there are about 230,000 potential vessels that would need to be in compliance.
Complicating matters further is the extent to which pool operators are aware of these new regulations. Industry insiders estimate that roughly 70 percent of pool operators are aware of the new rules. But there’s no real data on the number of pools that are already in compliance, with estimates ranging from just 10 percent to under 30 percent.
Can Lift Manufacturers Meet Demand?
Finally, government fiat may ultimately yield to the realities of a relatively sleepy market. The production capacity of handicap lift manufacturers may not be sufficient to meet a sudden surge in demand. Getzoff notes that roughly 14,000 lifts were manufactured over the past couple of years. And a representative from S.R. Smith, one of the leading lift manufacturers, estimates that the industry’s total production capacity is maybe 15,000 lifts per year. However, Getzoff says the APSP recently conducted a survey of industry production capacity and determined that the industry could ramp up to 30,000 to 60,000 lifts per year should demand warrant it.
The Two Stocks That Could Benefit
Unfortunately, only one of the major lift manufacturers is publicly traded. While Pentair (NYSE: PNR) manufactures an ADA-compliant pool lift, the vast majority of the company’s revenue is derived from its water and fluid processing solutions. With roughly half-a-dozen major competitors among pool lift manufacturers, it’s unlikely that increased sales of lifts will move the needle much for this company’s earnings.
That leaves Pool Corp. (NasdaqGS: POOL), the largest retailer and distributor of swimming pool equipment in the U.S. With a 40 percent market share in this space, Poolcorp would seem the most likely entity to benefit from this story. We spoke with Craig Hubbard, the company’s investor relations officer, who noted that Pool Corp. has enjoyed temporary spikes in revenue from other federal regulations in the past, such as the Virginia Graeme Baker Pool and Spa Safety Act, which mandated that all public pools and spas install anti-entrapment drain covers.
With regard to the latest regulation, however, Pool Corp. has yet to see more than anecdotal evidence of an impending wave of demand for the handicap lifts it sells at its nearly 300 locations. As one example, Hubbard noted that a store to which he made a recent site visit had four or five pool lifts in stock, whereas in the past they would have only previously been available via special order.
Hubbard also said that higher-priced items like lifts tend to have thinner margins than lower-priced products. Beyond that, Pool Corp. derives most of its revenue from the residential pool market, rather than commercial pools, so the company’s fortunes are largely dependent on the housing market, which is still fairly anemic.
Still, it will be interesting to see whether Pentair or Pool Corp. experience any meaningful upticks in revenue on the basis of the Justice Department’s latest rules.