Newly-Public SITE Has a Lot of Runway

 | Jun 08, 2016 | 8:59 AM EDT
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Distributors of things that we use every day, or even seasonally, can be great businesses.

Look at Pool (POOL) or Watsco (WSO), whose shares have multiplied like gremlins in water over the years. They tend to be solid earnings growth stories that have the potential for organic or acquisitive share gain in time. 

SiteOne Landscape Supply (SITE) went public on May 12 at $25.50. Shares sit around $28.50 today. The company is a distributor of irrigation equipment and landscape supplies serving residential (55%), commercial (30%) and recreational markets (15%) in the United States. Irrigation and fertilizer is about 55% of the $1.7 billion in expected 2016 sales. The balance is nursery, lighting, hardscaping (like rocks) and controls. Splitting up the company's sales even further, maintenance of existing landscapes is 45% of sales, while new construction sits at 37% and repair/upgrades at 18%.

John Deere (DE), which I've written about, began buying landscape distribution businesses in 2001 slowly.  In 2007, the company more than doubled down with the then-public fertilizer distributor LESCO and changed the name to John Deere Landscapes. In 2013, now SiteOne, Deere sold a majority stake to private equity firm Clayton, Dubilier & Rice (CD&R). Following the May IPO, CD&R owns 45% and John Deere owns 24% of the public entity SITE. 

The market is large -- $15 Billion in the United States and Canada by management's estimate. SiteOne is the largest, but only has 10% share. There is plenty of runway for this company from an M&A perspective, which would be additive to the 5% average organic revenue growth since 2012. The company could easily be a 10% revenue grower with the help of a continued bolt-on acquisition strategy. In addition to the top-line growth, there is an embedded pricing story that can drive margin expansion toward the company's 10% margin goal.

I like the runway for this company. At current valuation, it is trading in line with more established distributors, but at a material discount to housing-related distributors at the moment. This valuation gap will close if SITE executes on the strategy articulated in its IPO documents. If this happens, the stock can move higher, potentially into the $40s in time.

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