Rollins Earnings: Firm Firing on All Cylinders in Early 2023; Lifting FVE 7% on Fox Pest Acquisition

Rollins’ ROL 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.

We expect robust earnings growth in 2023 as the Fox acquisition, the ongoing rollout of Rollins’ route optimization program and operating leverage—from organic and acquisitive revenue growth—widens operating profit margin by about 130 basis points to 19.6%. Accordingly, we forecast 2023 EBIT of $592 million and EPS of $0.89, representing year-on-year growth of 20% and 21%, respectively. While Rollins is executing impeccably in early 2023, shares in Rollins screen expensively and trade at a 32% premium to our revised valuation.

We think Fox should prove a good fit for Rollins. Fox—the 13th-largest pest control services network in the U.S., with operations spanning 13 U.S. states—is complementary to Rollins’ existing U.S. pest control franchise and has the potential to deliver incremental economies of service density benefits likely to fatten Rollins’ operating profit margin and reinforce its wide economic moat. Fox also provides Rollins with an entry point into previously underpenetrated geographies, with the benefit of brand names that are already established within the localized pest control markets that Fox operates. We also think the financial terms of the deal are appealing. We expect the Fox acquisition to deliver at the top end of management’s guided EBITDA contribution range of $18-$22 million in 2023, with the potential for future cost synergy benefits in 2024 and beyond.