Soft Economy Set to Weigh on Rollins’ Top Line in 2023, but Inflationary Pressures Should Ease

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.

We expect the presently gloomy U.S. economic outlook to soften Rollins’ top-line growth somewhat in 2023. However, with the U.S. economy likely to recover in 2024, our long-term expectations for the wide-moat company are unchanged. We’ve increased our fair value estimate by 3.5% to $29 due to the time value of money. Still, the shares continue to screen expensively, trading at a 24% premium to our revised fair value estimate.

We anticipate a soft landing for the U.S. economy but still forecast meager economic growth of 1% in 2023, down from 2.1% in 2022. Against this cooling economic backdrop, we forecast Rollins’ organic top-line growth to slow to 4.4% in 2023 from a heightened 7.8% in 2022 as pest-control volume softens. Still, we expect robust earnings growth in 2023 as a combination of cost savings from the ongoing rollout of Rollins’ route optimization program and operating leverage—from organic and acquisitive revenue growth—widens operating profit margin by about 120 basis points to 19.5%. Accordingly, we forecast 2023 EBIT of $563 million and EPS of $0.85, representing year-on-year growth of 14% and 15%, respectively.