Landscaping is a big business in the modern era. People want their lawns to look presentable and with so many homes in existence because of such a large population, it stands to reason that there would be some sizable companies dedicated to providing the goods and services necessary to meet this need. One of the larger players in the US market, as well as a player that has a presence in Canada, is SiteOne Landscape Supply (NYSE:SITE). Historically speaking, performance achieved by management has been rather robust. Despite experiencing high rates of inflation for the current fiscal year, management continues to be optimistic about the near term. Having said that, quality companies don't come cheap. Relative to other companies that would be considered the closest comparables possible, shares of the firm do look rather pricey. But for how attractive the business is fundamentally, it's probably not overpriced. More likely than not, this firm is fairly valued at this moment.
As I mentioned already, SiteOne Landscape Supply is one of the largest national wholesale distributors of landscape supplies in the US. The company also has some operations in Canada. For the most part, its customers consist of residential and commercial landscape professionals who focus on lawns, gardens, golf courses, and other related outdoor spaces. According to management, 60% of the company's revenue came from sales made to residential construction customers. A further 30% was attributable to the commercial construction sector, while 10% was made to recreational and other construction customers.
As of the end of its latest fiscal year, the business boasted the operation of 590 branch locations spread across 45 states, as well as six provinces in Canada. The company currently sells to customers over 135,000 SKUs (stock keeping units) that range from irrigation supplies, to fertilizer, to natural stone, to nursery goods, to outdoor lighting, and so much more. To be more specific, the company says that 26% of its revenue is attributable to irrigation products. This is followed by 21% associated with hardscapes and 18% that goes into the fertilizer and other category. The other product lines for the company include landscape accessories at 13%, nursery products at 10%, control products at 8%, and outdoor lighting at 4%. On top of selling these products, the company also offers consulting services that are aimed to helping out with irrigation network design, commercial project planning, and other landscape-oriented activities.
With an estimated market size throughout North America of $23 billion, SiteOne Landscape Supply considers itself to be a major player. Not only that, the company has done extremely well to grow its business over time. Back in 2017, for instance, the company generated sales of just $1.86 billion. By 2021, sales had grown to $3.48 billion. Between 2020 and 2021 alone, sales of the company expanded by 28.5%. This came as a result of a 22% increase in organic daily sales for the company. Part of this, management said, was attributable to the broader stay-at-home trend caused by the COVID-19 pandemic. However, the company also said that price inflation contributed about half of the organic growth for the business. When it comes to the 2022 fiscal year, management does think that sales will continue expanding, with the firm ultimately experiencing high single-digit organic growth for the year. This should come in part as a result of high product inflation continuing throughout the year, with that inflation moderating in the second half.
From a profitability perspective, the picture has also been generally positive for the firm. Net income grew each of the past five years, climbing from $54.6 million in 2017 to $238.4 million last year. Inflation proved to be incredibly profitable for the enterprise, with profits surging 96.5% from 2020 through 2021. Other profitability metrics have generally been positive for the company as well. Operating cash flow, for instance, grew from $16.3 million in 2017 to $229.4 million in 2020. It then declined to $210.8 million last year. However, if you adjust for changes in working capital, growth would have been consistent, rising from $90.9 million in 2017 to $202.4 million in 2020 before jumping to $342.1 million last year. And finally, we have EBITDA. This metric also grew year after year, rising from $157.2 million in 2017 to $415.1 million last year.
When it comes to the company's 2022 fiscal year, the only guidance management gave regarding profitability related to EBITDA. According to the firm, EBITDA should rise by between 4% and 8%, implying a reading of between $430 million and $450 million. If we assume the same kind of growth rate, at the midpoint, will apply to operating cash flow and net income, then these metrics should be $362.6 million and $252.7 million, respectively. Using this data, we can effectively price the business.
Using the figures from 2021, we can see that the business is trading at a price-to-earnings multiple of 27.7. This drops to 26.1 if we rely on 2022 estimates. The price to adjusted operating cash flow multiple would decline from 19.3 if we use the 2021 figures to 18.2 if we use 2022 figures. And the EV to EBITDA multiple would drop from 16.5 to 15.6. To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 11.5 to a high of 19.8. And on an EV to EBITDA basis, the range was from 7.1 to 14.2. In both of these cases, SiteOne Landscape Supply was the most expensive of the group. Meanwhile, using the price to operating cash flow approach, the ranges from 3.6 to 95.5. In this scenario, three of the five firms were cheaper than our prospect.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|SiteOne Landscape Supply||27.7||19.3||16.5|
|WESCO International (WCC)||15.7||95.5||10.7|
|Univar Solutions (UNVR)||11.5||18.2||8.1|
|Air Lease Corporation (AL)||12.2||3.6||14.2|
|MSC Industrial Direct Co. (MSM)||16.1||29.2||11.6|
|Herc Holdings (HRI)||19.8||6.0||7.1|
Relative to similar firms, it's clear that SiteOne Landscape Supply is a rather pricey firm. But on an absolute basis, shares look to be more or less fairly valued. That's especially taking into consideration recent growth prospects as estimated by management. All in all, this enterprise is a quality operator. And if it were growing more rapidly, it might be considered underpriced. But that is not the case at this time and in this current environment.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.