On Nov. 24, 2021, SiteOne Landscape Supply Inc. (SITE, Financial) capped a stunning run of share price increases, hitting an all-time high of $251.70. That was almost a 10-bagger since its IPO in 2016.
Now, roughly 11 months and a major market slump later, the stock has given up more than half its gains, with shares closing at $113.15 on Oct. 27.
About SiteOne
SiteOne is a $5.10 billion company that calls itself “the largest and only national wholesale distributor of landscape supplies in the United States and have a growing presence in Canada,” according to its 10-K for 2021.
It sells over 135,000 individual products from 5,000 suppliers through 590 branch locations in 45 U.S. states and six Canadian provinces. Those products include irrigation supplies, fertilizers, pest control products, hardscapes (such as pavers and blocks), landscape accessories and outdoor lighting.
A typical customer is described as a private landscape contractor operating in a single market. However, the company also sells to construction and recreational contractors, with a 2021 revenue breakdown as follows:
- Residential construction represented 60% of 2021 net sales.
- Commercial and industrial construction (30% of 2021 net sales).
- Recreational and other construction (10% of 2021 net sales).
Competition
SiteOne reports that its main competition comes from regional distributors, most of which are local and privately owned. None of the nine major competitors it names are publicly traded, although one is a subsidiary of Pool Corporation (POOL, Financial).
Over the past five years, it has outperformed its benchmarks and the S&P 500 by a substantial margin:
It claims competitive advantages through its portfolio of products, geographic reach, onsite expertise and yard space for hardscapes and nursery goods. The annual report also claims its distribution centers provide strong supply chain capabilities.
Its margins are above average for the industrial distribution industry, and its return on invested capital is among the highest in the industry.
Fundamentals summary
To assess SiteOne's investment prospects and valuation, let's take a look at the GF Score. The GF Score for this company is an excellent 90 out of 100, driven by solid results for profitability, growth, GF Value, financial strength and momentum.
Financial strength
Based on its solid interest coverage ratio, debt-to-revenue ratio and Altman Z-Score, SiteOne receives a ranking of 7 out of 10 for financial strength from GuruFocus:
The interest coverage ratio is adequate for the task of covering interest expenses with operating income. Total debt comes to $316 million while revenue adds up to $3.476 billion, which is a strong showing. The Altman Z-Score is 4.96, indicating no risk of bankruptcy.
One reason for these strengths is that SiteOne is a value creator, with a return on invested capital of 16.67% that is double the weighted average cost of capital of 8.33%.
Profitability
The profitability ranking of 8 out of 10 is driven by strong results for the operating margin, Piotroski F-Score, trend of the operating margin and consistency of profitability.
SiteOne’s operating margin is above average for the industrial distribution industry, and the trend is headed in the right direction:
The Piotroski F-Score is typical for a stable company.
The consistency of profitability depends on the time frame we look at; it’s great if you look at the past five years but not so good if you look at the past 10 years:
Given that the business predictability ranking is based on the past 10 fiscal years of revenue and Ebitda increases, it comes as no surprise the company receives 0 out of 5 stars for business predictability.
Growth
Another high ranking is SiteOne's growth ranking of 8 out of 10, driven by strong revenue and Ebitda growth, as well as SiteOne’s revenue growth over the past five years:
Revenue growth, on both a three and five-year basis, has been smooth:
Ebitda growth has been almost as smooth but has grown more rapidly in the past year.
Free cash flow has been on even more of a roller coaster:
Valuation
Another strong ranking is SiteOne's 8 out of 10 for the GF Value rank. The GF Value rank is based on how well stocks with a similar GF Value score have performed historically.
At the close of trading on Oct. 26, SiteOne’s market price was $113.50, while the GF Value was $184.
The price-earnings ratio comes in at 18.04, above the S&P 500 median of 14.91.
Still, dividing 18.04 by the five-year Ebitda growth rate of 29.31% per year provides a PEG ratio of 0.62, which is well below the fair-value mark of 1.00.
Gurus
Six of the investing gurus followed by GuruFocus have stakes in SiteOne. Here are the top guru owners of the stock:
- Baillie Gifford (Trades, Portfolio) had 2,695,158 shares at the end of the second quarter after reducing its holding by 16.38%. Those shares represented 5.99% of SiteOne’s shares outstanding and 0.33% of the firm's 13F portfolio.
- Ron Baron (Trades, Portfolio) of Baron Funds held 1,716,539 shares, after adding 62.32% in the quarter that ended June 30.
- Frank Sands (Trades, Portfolio) of Sands Capital Management owned 288,977 shares, initiating a new holding.
SiteOne enjoys excellent support from institutional investors who held 95.89% of shares outstanding as of the recent quarter. Insiders are led by CEO Doug Black with 525,598 shares.
Conclusion
Long-term shareholders of SiteOne have had a rough ride over the past 11 months, with their stock dropping sharply and with no immediate prospect of a recovery. Yet, we should expect a recovery in my opinion, as I believe the stock is undervalued based on its GF Score. When a stock’s performance, especially its earnings, go up significantly while its share price keeps swooning, there is cognitive dissonance. When the markets recover, as they always have in the past, there could be big potential for this stock.
