UBS Initiates SiteOne Landscape With Buy Rating, $32 Target

UBS analysts, Shannon O'Callaghan and Christopher Belfiore initiated coverage on SiteOne Landscape Supply Inc

with a rating of Buy. The brokerage also kept a 12-month price target of $32 as the investment advisor believes that the company is well-positioned in its targeted distribution vertical. The brokerage thinks that Site one's two-pronged growth story has legs in highly fragmented market. It has a ~9% share of the highly fragmented North American landscape supply market and it sees using its size and scale to grow organically and inorganically as the main consolidator in market. While the company reported strong organic growth of 7 percent in 2015, it added another 15percent from acquisitions. Therefore, the two analysts expect a similar organic growth in 2016 with another 10.5 percent from acquisition contribution. UBS thinks that SiteOne has taken considerable strides in reducing its cost base fueling 3.2 percentage points expansion in gross margin last year. The brokerage pointed out that it was only one-third of the $54 - $72 million cost cutting estimated between the years 2015 and 2018. O'Callaghan and Belfiore said, "We expect the company to work down net leverage to ~2.8X by year end and under 2.0 by the end of 2018 (at the low-end of SITE's target net leverage range of 2.0 – 3.0 OX). With FCF conversion over 100%, we think the company has ample cash flow to both pay down debt and invest organically and inorganically." The two analysts viewed Site's current position and potential as similar to that of WSO and POOL at their earlier stages of development. Therefore, they said, "We think it could see valuation potential closer to that of POOL and WSO." The stock traded 1.4 percent higher on Monday.