Summary
- The 2022 results of SiteOne Landscape Supply, Inc. demonstrated the resilience of its business model.
- Geographical expansion through disciplined acquisition is likely one of the most effective ways to build a strong competitive advantage, and SiteOne has a proven track record in this regard.
- The SiteOne Landscape Supply, Inc. 2023 outlook is not as good as 2022, which may provide opportunities for more attractive prices.
SiteOne Landscape Supply, Inc. ( SITE ), the leading wholesale distributor of landscape supplies in the U.S. and Canada, sells durable products such as hardscapes, nurseries, irrigation equipment, etc. The company has a history of delivering impressive financial results, and in 2022, it has shown remarkable resilience and profited from rising inventory prices due to inflation. Additionally, the stock has outperformed the S&P 500 (SP500) for the past five years on a consistent basis. I think SITE is a high-quality business that could continue to outperform the market. Nonetheless, the current price is not compelling enough to warrant investment.
Business update and continued strength
In the most recent quarter , SiteOne Landscape Supply, Inc.'s net sales increased by 11% to $890 million, while for the entire year, net sales increased by 16% to $4 billion. I think SITE's 2022 performance is very good considering the Macro challenges we are facing. The increase in organic daily sales for the fourth quarter and full year was primarily due to price inflation, but was partially offset by lower volume resulting from higher prices and softening economic conditions.
Over the past decade, SiteOne Landscape Supply has achieved a four-fold increase in sales and consistent improvements in both gross and operating profit margins, as shown in the accompanying chart. This impressive performance has resulted in a ten-fold increase in earnings over the same period, representing a significant accomplishment.
Nevertheless, SiteOne also issued lots of shares, which led to share dilution, especially in 2017. In the last 10 years , its share count grew 3x. SITE stock is clearly in the growth phase, as the CEO said during the conference call :
Our number one priority is to invest in acquisitions and grow the business and invest there.
Geographic expansion is one of the best moats
It seems that SITE's growth strategy has been very successful in attracting and retaining a large customer base, as well as expanding their physical presence across North America. SITE possesses the necessary local knowledge to establish a supply chain that comprehends the market demand in each area, with a customer base exceeding 280,000, 630 branches, and 4 distribution centers located in more than 50% of the 384 US Metropolitan Statistical Areas (MSAs). They have established themselves as a clear industry leader in the wholesale landscaping products distribution market.
Furthermore, the highly fragmented nature of the industry provides an opportunity for SITE to continue expanding its market share beyond its current estimated 16% . Its ability to offer a one-stop-shop for landscape service firms, saving them time and increasing efficiency, is a valuable service that sets SITE apart from smaller, regional businesses with limited product offerings and supplier relationships.
Overall, SITE's growth strategy appears to be working well for them. Their position as an industry leader and ability to offer real convenience for their customers bodes well for their continued success in the future. I believe that SITE has robust barriers to entry that make it difficult for its rivals to compete in the same market.
Historical strength with John Deere
I also appreciate SITE's historical association with Deere & Company (DE), which began when John Deere Landscapes was formed by the merger of McGinnis Farms, a nursery wholesaler located in Alpharetta, GA, and Century Rain Aid, a distributor of landscape and irrigation supplies based in Madison Heights, MI. The merger resulted in the establishment of over 200 stores throughout the United States and Canada. John Deere is renowned for its operational expertise in the construction industry and its ability to acquire local businesses and foster local relationships. SITE's acquisition strategy has been highly successful, which can be attributed to its exceptional proficiency in the landscape construction area, but may also be made possible by its affiliation with John Deere.
2023 will not be great
In 2023, SiteOne Landscape Supply, Inc.'s outlook is not great. It predicts a decline of around 20% in new residential construction, which accounts for 21% of their sales, due to consumers adapting to high home prices and mortgage rates. Meanwhile, the commercial and recreational construction market (14% of their sales), is expected to be more stable. The major repair and remodel market, representing 29% of their sales, is expected to remain relatively flat. In 2022, the increase in gross margin was due to significant price realization. However, it is unlikely that this will occur in 2023.
So the management understands that they are heading into a down cycle in the coming year. That being said, when the market goes down, it offers SITE more opportunities to do acquisitions with high returns.
Bottom Line
In my opinion, SiteOne Landscape Supply, Inc. is a high-quality business with a skilled management team that effectively executes acquisition strategies and maintains successful geographical expansion over the past two decades. The current stock price appears to have dropped to a level that aligns with its revenue sales per share line (as depicted in the chart below).
SiteOne Landscape Supply, Inc. operates within a traditional landscape wholesaling industry that typically experiences only single-digit organic growth. There is also limited room for improvement as the gross margin has already reached 35%. I believe SITE stock is not undervalued when compared to the SP500, considering its current EV/Ebitda multiple of 16x and EV/Sales multiple of 1.84. Nevertheless, SiteOne Landscape Supply, Inc. is a business worth monitoring. In the event of a significant downgrade or meaningful pullback, a contrarian trade may result in substantial long-term returns with SiteOne Landscape Supply, Inc.
For further details see:
SiteOne Landscape Supply: Compounding Machine That Grows Via Acquisitions