William Blair: SiteOne Landscape Supply Could Have Robust 2018 With M&A, Margin Expansion

SiteOne Landscape Supply Inc SITE is poised to benefit from a combination of factors, including healthy landscape demand, growing M&A appetite and margin inflection in 2018, an analyst at William Blair said.

The Analyst

William Blair analyst Ryan Merkel upgraded shares of SiteOne Landscape from Market Perform to Outperform.

The Thesis

2018 could be a robust year for M&A and margin expansion, Merkel said in a Friday note. (See the analyst's track record here.) 

The possibility exists for SiteOne to execute a few larger M&A deals, the analyst said. Helped by improved pricing, SG&A leverage, category management and supply chain, the company's EBIDTA margin could expand over 100 basis points in 2018, Merkel said.

The demand outlook remains supportive due to rising new housing starts, strength in home improvement and mid-single-digit commercial construction growth, the analyst said. 

Over the long term, the analyst said he sees the potential for gross margins to expand by 200-300 basis points and EBITDA margins to rise by 300-400 basis points.

William Blair raised its 2018 EBITDA estimate to $206 million and 2019 EBITDA estimate to $265 million.

"We had been waiting for a pullback to get more aggressive, but we believe the greater risk is the stock continues to run," Merkel said. "In our view, SiteOne's dominance in a niche market, significant white space to expand share, moat against internet competition and reliable management command a premium valuation."

Based on a bull case EBITDA assumption of $355 million in 2020 at 13 times valuation, the firm sees 34 percent upside from current levels to $100.

The Price Action

SiteOne Landscape shares have nearly doubled over the past year.

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