3 Reasons SITE is Risky and 1 Stock to Buy Instead

Over the past six months, SiteOne’s stock price fell to $133.81. Shareholders have lost 6.6% of their capital, which is disappointing considering the S&P 500 has climbed by 3.1%. This might have investors contemplating their next move.

Is there a buying opportunity in SiteOne, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think SiteOne Will Underperform?

Despite the more favorable entry price, we're swiping left on SiteOne for now. Here are three reasons you should be careful with SITE and a stock we'd rather own.

1. Core Business Falling Behind as Demand Plateaus

In addition to reported revenue, organic revenue is a useful data point for analyzing Specialty Equipment Distributors companies. This metric gives visibility into SiteOne’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, SiteOne failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests SiteOne might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

SiteOne’s EPS grew at an unimpressive 7.1% compounded annual growth rate over the last five years, lower than its 11.7% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, SiteOne’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

We see the value of companies helping their customers, but in the case of SiteOne, we’re out. After the recent drawdown, the stock trades at 29× forward P/E (or $133.81 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d suggest looking at one of our top software and edge computing picks.

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