SiteOne Landscape Supply Finds Fertile Ground

Investors have found a lot to like with SiteOne Landscape Supply (NYSE: SITE). The company priced their IPO last night at $21, inside their proposed pricing range of $20-22.  To the delight of investors the SITE story is simple and their business isn't rocket science. SiteOne provides wholesale landscape supplies and services to residential and commercial landscaping firms.

There is a huge underwriting team on the deal with Deutsche Bank, Goldman and UBS leading with four more "co-leads" and six more "co-managers." Although the mix of the group is a little rag-tag this company will get strong sponsorship.

They have achieved scale with $1.4B revenues last year and generated EBITDA of $107M for the year. They have demonstrated solid organic growth (~23%) but grow via acquisition. SITE is the largest player in the market by far yet only controls 9% of the total so their M&A landscape remains very rich in targets. The formula and plan for the future is more of the same.

One direct comparable the management team brings up is Pool Corporation (NASDAQ:POOL) which has executed a similar plan in the pool supply space. POOL has been a strong performer in the market the last 5 years - up 200% to $90/share and a $1.3B market capitalization. At the current level the shares command a 29 P/E multiple and 1.6x sales.

Two other useful comparable companies are WW Grainger (NYSE:GWW $231) and HD Supply (NASDAQ: HDS $33). GWW has a $14B capitalization, 20x P/E and 1.43 P/S. The numbers for HDS are 6.75B, 5x P/E and 0.91 P/S.

In thinking about where SITE should trade we'd use the 1.5x P/S as a starting point. (We're going to ignore the debt for now.) Because this company will grow faster than the market for some time it's reasonable to consider a 20x PE or even better as a starting point.

One point to consider is that in this IPO the 10M shares offered are coming from existing stockholders. The company won't be receiving proceeds from the IPO. They recently closed a financing deal that takes the pressure off. However we might expect this team to be back in the market in a couple quarters if they continue to execute well.

There is a "reinforcing loop" that will help SITE build their business and generate returns - as they grow their scale gives them access to better pricing and allows them to offer the best selection of products. (In some ways this is similar to how Amazon approaches the consumer market.) However SITE is a full service supplier so they need to generate margins that will allow them to offer the services needed to keep their customers happy and productive.

Post offering the company will have 40M shares outstanding. At the mid-point that's $840M. We see the shares trading at a minimum of 1.0x sales without accounting for debt. That gets us to $35/share.

Looking at PE we need to do a few calculations. If we use POOL margins for instruction and the current numbers for SITE we get: $1.6B revenue and $100M normalized operating income.  At a 20x PE that puts the shares at $50.

So it's easy to see why investors like this story here in the low-$20 range.

Management does a nice job with the story and presentation. Investors look at SITE long term should certainly review the SITE IPO Slides and the SITE IPO Prospectus . We are working on a transcript and that will be up soon.

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