Company Reports

Wide-moat Rollins’ got off to a strong start in the first quarter of 2024. First-quarter sales grew by about 14%, including 7.5% in organic growth. The pleasing first-quarter organic growth outcome likely points to further outperformance of Rollins’ pest control business relative to the broader US pest control market in early 2024. Inclusion of revenue from the Fox acquisition—which completed part way through 2023—largely accounted for the remainder of the strong top-line result. The group’s EBIT margin widened by 130 basis points to 18.3%, with Rollins benefiting from operating leverage as its revenue base increases and its service technician route density improves.

Rollins’ strategy is to reinforce the density benefits afforded to its market-leading operations in the highly localized pest-control services markets it competes in across North America. Ever-improving unit costs are offered by economies of density in each regional market in which Rollins operates. Rollins seeks to continue to amass these benefits via organic growth and a continued focus on tuck-in acquisitions aimed at rolling up the fragmented North American pest-control services market.

Rollins’ strategy is to reinforce the density benefits afforded to its market-leading operations in the highly localized pest-control services markets it competes in across North America. Ever-improving unit costs are offered by economies of density in each regional market in which Rollins operates. Rollins seeks to continue to amass these benefits via organic growth and a continued focus on tuck-in acquisitions aimed at rolling up the fragmented North American pest-control services market.

Wide-moat Rollins' performance in the fourth quarter of 2023 remained robust, rounding out a third consecutive year of strong execution and pleasing earnings growth. Organic sales growth softened a touch to about 7%, down from 8.4% in the prior quarter, thereby falling short of our expectations for late 2023, with our full-year organic growth forecast of 8.6% implying similar fourth-quarter organic top-line growth to that of the first nine months of year. Still, full-year 2023 sales of $3.1 billion tracked modestly ahead of our forecast owing to a stronger-than-expected contribution from bolt-on acquisitions in late 2023. Rollins' fourth-quarter operating profit margin also underwhelmed us, leading full-year 2023 EBIT of $604 million to modestly trail our forecast.

Rollins’ strong third-quarter performance provided investors with a level of comfort that North American pest-control market conditions haven’t deteriorated sharply in recent months. The company delivered elevated organic growth of 8.4% year on year—largely according with our full-year 2023 organic growth expectations—outperforming the weak third-quarter North American result for wide-moat peer Rentokil Initial. Price increases more than offset inflationary pressures and worked in combination with operating leverage to continue widening Rollins’ operating margin, which rose 240 basis points to 22.3% in the third quarter and thus was tracking modestly ahead of our prior expectation for 2023 EBIT margin progression.

Rollins’ strategy is to reinforce the density benefits afforded to its market-leading operations in the highly localized pest-control services markets it competes in across North America. Ever-improving unit costs are offered by economies of density in each regional market in which Rollins operates. Rollins seeks to continue to amass these benefits via organic growth and a continued focus on tuck-in acquisitions aimed at rolling up the fragmented North American pest-control services market.

Rollins’ performance remained buoyant in the second quarter of 2023. Organic revenue growth slowed somewhat—to 7.7%, down from 9.2% in the first three months of 2023—but still tracks in line with our full-year expectations for lofty year-on-year growth of 8%. Year to date, Rollins’ commercial pest-control and termite volumes have been particularly strong, leading to the robust top-line performance thus far in 2023. Rollins remains on track to deliver significant earnings growth in 2023 with our full-year estimates largely unchanged—we forecast EBIT of $596 million and EPS of $0.89, representing year-on-year growth of about 21% each. The recent Fox Pest Control acquisition and elevated organic growth both contribute to the strong expected earnings growth of 2023. The inherent operating leverage in Rollins’ cost base also contributes handsomely and we expect meaningful EBIT margin progression of 140 basis points in 2023 to 19.7%.

Rollins’ strategy is to reinforce the density benefits afforded to its market-leading operations in the highly localized pest-control services markets it competes in across North America. Ever-improving unit costs are offered by economies of density in each regional market in which Rollins operates. Rollins seeks to continue to amass these benefits via organic growth and a continued focus on tuck-in acquisitions aimed at rolling up the fragmented North American pest-control services market.

Rollins' first-quarter 2023 performance was stellar, delivering outsize organic growth that tracked well ahead of our prior full-year estimates. The recently announced $350 million acquisition of Fox Pest Control constituted a further key first-quarter achievement. We lift our fair value estimate by 7% to $31 to account for the acquisition, which we think is complementary to Rollins' existing pest control franchise and will likely prove value accretive for shareholders. Upgraded 2023 organic growth expectations also contribute to our fair value estimate uplift.

Rollins delivered a strong finish to 2022 as its fourth-quarter performance capped off a second consecutive year of lofty pandemic-fueled organic revenue growth. Full-year EBIT of $493 million and EPS of $0.75 aligned with our estimates and represented respective growth of 10% and 5% year on year. Strong pest-control volume and outsize price increases—which successfully protected Rollins’ profit margins from cost inflation in 2022—contributed to the robust organic growth. Indeed, the sizable pricing uplift in combination with operating leverage led to a 20-basis-point year-on-year improvement in adjusted EBIT margin to 18.3% despite broad inflationary pressures that affected labor, materials and consumables, and vehicle expenses during 2022.

Rollins’ strategy is to reinforce the density benefits afforded to its market-leading operations in the highly localized pest-control services markets it competes in across North America. Ever-improving unit costs are offered by economies of density in each regional market in which Rollins operates. Rollins seeks to continue to amass these benefits via organic growth and a continued focus on tuck-in acquisitions aimed at rolling up the fragmented North American pest-control services market.

Wide-moat Rollins continues to please investors in late 2022, with the performance of its U.S. pest control franchise defying heady inflationary pressures and slowing economic activity. Strong organic sales supported third-quarter revenue growth of 12.2%, tracking in line with our full-year expectations. Further, operating profit margin has, as we’d anticipated, remained impervious to cost base pressures in late 2022 as the robust price increase put in place during late spring offset inflation in fuel, labor, and material and supplies expenses. Consequently, Rollins’ third-quarter EBITDA margin of 23.3% was largely flat year on year but is importantly 3.4% higher than its first-quarter 2022 showing that was significantly impacted by inflationary headwinds. We’ve nudged our full-year 2022 EBIT and EPS estimates up by about 3% and 4% to $498 million and $0.75, respectively, with operating leverage benefiting group EBIT margin slightly more than we’d previously credited. But the impact is relatively immaterial; along with a time value of money adjustment, we lift our fair value estimate by 1% to $28 per share.

Rollins’ strategy aims to further reinforce the density benefits afforded to its market-leading operations in the highly localized pest-control services markets, which it competes in, across North America. Ever-improving unit costs are offered by economies of density in each regional market in which Rollins operates. Rollins seeks to continue to amass these benefits via organic growth and continued focus on tuck-in acquisitions aimed at rolling up the fragmented North American pest-control service market.

Rollins is traversing the presently scorching inflationary environment with the ease we’d anticipated, as unfettered volume growth and robust price increases contributed to solid second-quarter organic revenue growth of 7.5%. Importantly, Rollins’ gross margin rebounded to about 53% in the second quarter, up from a softened first-quarter reading of 50%, showcasing the inflation-resistant nature of its U.S. industry-leading pest control franchise.

Rollins’ strategy aims to further reinforce the density benefits afforded to its market-leading operations in the highly localized pest-control services markets, which it competes in, across North America. Ever-improving unit costs are offered by economies of density in each regional market in which Rollins operates. Rollins seeks to continue to amass these benefits via organic growth and continued focus on tuck-in acquisitions aimed at rolling up the fragmented North American pest-control service market.

While inflation pressures mounted for Rollins in the first quarter of 2022, we think the full-year earnings outlook remains bright. First-quarter organic revenue grew 6.3%, broadly tracking our full-year expectations as the U.S. economy continues to recover from the pandemic. The contribution from tuck-in pest control acquisitions was also robust and added a further 3.3% to top line growth. Still, gross margin pressure was evident as fuel and personnel costs spiked in the present inflationary environment. Despite the near-term challenge that inflation poses, our long-term thesis for the wide-moat name is unchanged as is our USD 27.70 per share fair value estimate. Still, Rollins shares screen expensively, trading at a 21% premium to our valuation.

Wide-moat Rollins capped off an already impressive 2021 performance with a strong fourth-quarter showing. 2021 adjusted EBITDA of $546 million tracked 2% ahead of our full-year expectations. On a constant-currency basis, full-year organic sales grew at an elevated 8.7%, aligning with our expectations for a strong cyclical recovery in pest control demand in 2021. However, Rollins’ M&A activity proved more buoyant in late 2021 than we’d anticipated. Tuck-in acquisitions added 2.7% in additional top-line growth in 2021 and drove the business’ modest outperformance relative to our revenue and earnings forecasts. Otherwise, Rollins' late 2021 performance tracked in line with our long-term expectations for the U.S. pest control industry leader. Accordingly, we make no change to our $27.70 fair value estimate. Despite recent share price weakness, Rollins shares still screen expensively, trading at an 8% premium to our fair value estimate at the time of writing.

Rollins’ strategy aims to further reinforce the density benefits afforded to its market-leading operations in the highly localized pest-control services markets, which it competes in, across North America. Ever-improving unit costs are offered by economies of density in each regional market in which Rollins operates. Rollins seeks to continue to amass these benefits via organic growth and continued focus on tuck-in acquisitions aimed at rolling up the fragmented North American pest-control service market.

Rentokil Initial’s USD 6.7 billion bid for Terminix Global Holdings--the second largest pest control player in North America--is set to be a transformative deal which will create a clear, global market share leading player in pest control. While the deal has the support of the boards of Rentokil Initial and Terminix, the deal remains subject to shareholder approval from shareholders of both companies and U.S. anti-trust clearance. Nonetheless, we don’t see anti-trust concerns nor the necessary shareholder approvals as impediments to deal closure, and raise our fair value estimate for Rentokil Initial by 3% to GBX 535 per share, reflecting the modest shareholder value accretion we expect to eventuate from the deal. That said, the final steps could take several months to complete, so we haven’t yet incorporated the merger into our financial estimates for Rentokil.

We initiate coverage on Rollins with a $27.70 fair value estimate and wide economic moat rating, reflecting the superior cost position enjoyed by the North American pest-control leader. We further assign a Standard capital allocation rating and a medium uncertainty rating. At present, the pest-control industry screens as overvalued with Rollins and wide-moat Rentokil Initial trading at sizable premiums to their respective fair value estimates. Nonetheless, Rollins is our preferred exposure amid our pest-control coverage, following the recent market pullback, which saw Rollins’ stock price performance significantly underperform its peers.