SiteOne Landscape Supply, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

SiteOne Landscape Supply, Inc. is a national wholesale distributor of landscape supplies, targeting primarily landscape professionals and also a small amount of retail customers in the U.S and Canada.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

SiteOne operates as a wholesale distributor of landscape supplies catering primarily to landscape professionals. The business model revolves around sourcing a wide range of products, including irrigation supplies, fertilizer, and hardscapes, and distributing them through a geographically extensive network. Their clientele mainly consists of landscape contractors, who depend on SiteOne for their consistent and reliable supply chain.

It’s important to note that while SiteOne does sell a large amount of products to homeowners, they are not the focus of their operations.

Their business model focuses on professional landscaping, and as a result, their success depends on their ability to keep the loyalty of professional landscaping firms, and not necessarily the end-user.

The landscape supply industry is characterized by several trends:

  • Growth in Landscape Construction & Maintenance: The underlying demand for landscaping services, both installation and maintenance, is driven by the overall health of the housing market, and by spending on outdoor spaces. This has been a good tailwind for the company.
  • Demand for Sustainable Solutions: Environmental consciousness is leading to increased demand for more eco-friendly and water-efficient products, which might benefit companies which focus in that area.
  • Shift towards Professional Landscaping: People are increasingly opting for professional landscaping services, for the creation of patios, decks, and green spaces.
  • Consolidation in Distribution: The landscape distribution business is fragmented, with regional players and several smaller companies, however, there is a continuous trend of consolidation in the industry that would lead to a limited number of bigger players that can create economies of scale.
  • Supply Chain Issues: Ongoing supply chain issues, including rising prices, and a lack of availability in various components of their products, especially PVC resin which are used to produce a range of their plastic products. These are posing some challenges in the business and for profit margins.
  • Impact of Inflation: The company is facing inflationary pressures which, in turn, have lead to increased prices of raw material and finished products. This will have to be seen whether these increased costs can be consistently passed to customers.

Financial Analysis

  • Revenues and Growth:

SiteOne has seen consistent revenue growth over the past few years, primarily driven by acquisitions, price increases and strong organic growth. From 2021 to 2022, the company has seen a revenue growth of 23%, and a 20% growth from 2022 to 2023. They are currently projecting revenue growth to increase by 5% to 7% for the full fiscal year 2023. They are also expecting to earn slightly less per share in 2023 compared to 2022, due to changes in the economy.

  • Profit Margins:

Gross profit margins have been relatively stable over the past three years, hovering around 34% and 35%, which is a good sign considering the inflationary environment. Operating margins have shown a slight increase in 2022 compared to 2021, moving from 13.7% to 14.2% showing improvements in efficiency and cost management.

  • Debt and Leverage: The company uses its credit facility to purchase stock and make acquisitions. As of Dec 31, 2022, they had $700 million of long-term debt. The company seems to be using leverage, but not at an unreasonable level.
  • Capital Allocation: The company has been heavily utilizing its capital on acquiring other companies to increase growth and reduce competition. They also spent $140 million on buying back their own stock in 2022, but have stopped that in recent quarters.
  • Cash Flow: The company’s free cash flow is volatile, depending on a number of factors, like acquisitions, operating efficiencies, inventory, etc. The company needs to improve how to generate cash from its operations in a more consistent way.

Competitive Landscape

SiteOne operates in a fragmented industry with a diverse set of competitors:

  • National & Regional Distributors: Competitors such as Pool Corporation, LESCO and others provide a wide range of products. This market is mostly fragmented, and the company is competing with other similar distributors, both local and regional, especially in states where it has yet to achieve maximum penetration.

  • Direct Manufacturers: Some manufacturers sell directly to professional landscapers, thereby bypassing traditional distributors. These are companies which the company directly competes with.

  • Small, Independent Dealers: Numerous small, local dealerships exist that have a strong relationship with local landscaping companies. They serve specialized customers in niches, and serve more for local, smaller firms.

  • New Online Distribution Channels: E-commerce platforms are becoming new threats. While these companies often cannot ship heavy building supplies profitably, they can offer products and supplies that are often smaller, or can provide delivery in certain cases. This creates a problem for the company as the competition intensifies.

What Makes SiteOne Different?

  • National Scale & Wide Distribution Network: SiteOne boasts a vast network of distribution centers and stores across the United States and Canada. This network enables a reliable supply chain for their customers, allowing them to access products and supplies without delays. This network is expensive to copy.
  • Product Selection: The company also offers a huge selection of both commodity and speciality products, allowing their customers to source all their requirements from one place.
  • Geographic Diversification: With locations in 45 states and 6 Canadian provinces, the company is not as exposed to local economic problems as its smaller counterparts.
  • Focus on the Professional Landscaper: They seem to focus more on the professional landscaper which gives them a stickier clientele as they are more likely to rely on the company.

Moat Evaluation

Moat Rating: 2/5

SiteOne’s moat is best described as narrow, because it does have some advantages, but they may not prove that durable in the long-term.

Here’s a breakdown:

  • Network Effects: The business benefits from its wide distribution network that serves its customers. It is unlikely for a company to replicate this extensive network and supply chain. This provides the company with cost efficiencies, and ensures that they can deliver on time.
  • Switching Costs: For professionals, switching from one supplier to another can be costly, so this creates some switching costs in the form of time and effort to reorganize. However, switching costs are not extremely high as they might be in a software company.
  • Intangible Assets: They do have some intangible assets in the form of brands of products they manufacture (LESCO, Pro-Trade, etc), however, these are not extremely well-known and can be easily copied. The strongest intangible asset, however, comes from their network.
  • Cost Advantages: The company does have slight cost advantages in certain areas like large scale distribution centers and high purchasing volume, but again, these are not unique and not that defensible.
  • Size Advantage: While the company has an advantage because of its sheer size, it still needs to innovate and keep adapting in order to compete.

As a result, while there is some evidence of a moat, it is not very strong and they can be easily eroded. The company needs to show the ability to keep on innovating and improving in order to get better and create a strong moat.

Risks to the Moat and Business Resilience

  • Economic Downturn: Being involved with the housing market, the company could be heavily affected by slowdowns in the industry. Consumers may become less willing to spend on landscaping services if the overall economy worsens, leading to lower revenue for SiteOne.
  • Increased Competition: Further consolidation in the industry could lead to more competition and increased price wars, potentially lowering margins and returns for the company.
  • Supply Chain Disruptions: Problems with sourcing raw materials and products could lead to higher prices and lower availability. These issues could have an impact on the business’ profitability and revenues if the company cannot secure its supply chain.
  • Pricing Pressures: Higher prices are a double-edged sword. While they increase revenue, the higher prices might lead to consumers to change their buying habits or look for cheaper alternatives, and therefore, lower the demand.
  • Acquisition Risk: The company makes frequent acquisitions, and there is an integration and execution risk in that. They need to properly integrate those companies, and if they mess up the acquisition, it could lead to a negative impact on the company.
  • Technology Disruption: Although this isn’t the most prominent threat, given how traditional the landscaping sector is, the rise of technology and online sales in the industry might pose some long-term risk for the company.
  • Debt: The company utilizes debt to fund its acquisitions and other expenses, any rapid rise in rates could severely hamper the company’s ability to refinance its debts, or acquire new loans.

Business Resilience: SiteOne has shown decent resilience, even in times of economic uncertainty. Their focus on the professional landscaper, and how tightly integrated they are into the supply chain, gives them good protection. Furthermore, the size of their operations and their geographically diverse network gives them greater leverage over smaller and more localized companies.

Understandability Rating

Understandability: 2/5

The business model itself is quite straightforward: a wholesale distributor that sells products to professionals for landscaping. However, determining the future trajectory of the company requires one to be well versed in its financials, future prospects, as well as the competitive landscape. While at its core it is a distribution business, various moving parts, acquisitions, and other financial aspects makes the complete picture to be more complicated, and harder to model. For the average person it will be hard to deeply understand all aspects of the business.

Balance Sheet Health

Balance Sheet Health: 3/5

  • Moderate debt levels: SiteOne uses long-term debt to fund acquisitions, which means they aren’t heavily reliant on short term borrowings. This is good to have, but it does add a component of financial risk.
  • Solid Current Ratio: Their current ratio, which is an indication of whether the company can pay its short-term debts with its current assets is at 1.75, which is good.
  • Reasonable levels of assets: The assets of the company, while a bit top-heavy with goodwill, seem to be more than adequate, which means the company has a comfortable margin to maneuver.
  • No large cash holdings: the company keeps very little excess cash, this, therefore, means that any financial issues the company faces will need to be funded by outside debt.
  • Consistent Stock Buybacks & Acquisitions : While growth through acquisitions are a good way to increase revenue, it does mean that large amount of capital has been allocated outside of improving or stabilizing the company’s financial health.

As a result, the company has solid fundamentals, but at the same time has a significant debt component on its books, therefore, a 3 out of 5 would be a fair rating.

Recent Concerns / Controversies

  • Declining Margins: In the Q3 2023 earnings call, the company mentioned they have seen pressure on margins because of their customers’ push for lower prices which resulted in them having to reduce prices. Furthermore, they also mentioned that the inflation is still persistent and they are expecting higher cost inputs in the future, all of this could potentially negatively affect the company’s profitability in the coming quarters.

    • Lowering Guidance: In the recent earnings calls, management has provided guidance for the remainder of 2023 and the initial numbers indicate that revenue growth will be in the mid to low single digits, which is a downward revision compared to initial guidance of high single-digit growth.
  • Decreased Share Repurchase Program: During a time when the share price has come down, they have reduced their stock repurchase program, that could be a missed opportunity to buy back shares at lower valuations.
  • Debt Levels: Although the company isn’t in an immediate risk, and is in compliance with all of its debt covenants, given the current high interest rates they would have had to pay a greater amount if they have to refinance their debt. So, they do have a significant amount of debt in a high interest environment.
    • Growth from Acquisitions: While the company has been aggressive in acquiring different companies, there is no certainty that they will all produce synergies and provide an acceptable rate of return, as they are essentially bets on future prospects. Furthermore, these acquisitions, especially in a period of high debt, can become more difficult for the company to execute and pay for.