Newly-Public SITE Has a Lot of Runway

 | Jun 08, 2016 | 8:59 AM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

site

,

de

,

pool

,

wso

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.

Columnist Conversations

Now that AAPL has violated the shorter term support, these are the two areas I have to consider for new buy en...
The symmetry is holding up in MCD.  Target 1 is 163.34 if we continue to hold above here!  ...
As far as TSLA is concerned, I still have a higher target above the market at the 409 area.  I stated in ...
The TLT setup discussed in my last commentary is a bust. Key support was violated and it violated the recent l...

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.