SiteOne has had an impressive run over the past six months as its shares have beaten the S&P 500 by 5.1%. The stock now trades at $143.67, marking a 15.4% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in SiteOne, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is SiteOne Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about SiteOne. Here are three reasons why SITE doesn't excite us 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 Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for SiteOne, its EPS declined by 12.2% annually over the last two years while its revenue grew by 5.1%. 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

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

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. Over the last few years, SiteOne’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

SiteOne’s business quality ultimately falls short of our standards. With its shares outperforming the market lately, the stock trades at 34.6× forward P/E (or $143.67 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.

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