1 Pest Control Stock You Don’t Want To Miss

When times are perilous, shoring up your portfolio with stocks that have stood the test of time is a smart strategy. One such company is Rollins, which managed to weather the Great Recession in style by growing revenues when housing and technology stocks were being eviscerated.

Rollins (NYSE:ROL) is a leader in the pest and termite control industry and makes for a compelling investment option thanks to its unique blend of traits, such as a recession-resilient business model, strategic growth through acquisitions, burgeoning international presence and technological innovation.

Given that pest control is a perennial need, the demand for Rollins’ products are largely unaffected by economic downturns, meaning the company enjoys an economic moat that few industries possess.

Recession-Resistant Business Model

Even during downturns, the demand for pest and termite control services tends to remain stable, a rare economic feat, which according to a Harvard Business Review study, only 9% of companies achieve.

Rollins not only has managed to weather financial storms but has impressed on the top line for as far back as we could research. In the past 10 years, each and every single quarter, 40 in total, year-over-year revenue growth was positive.

Surely, there is some fly in the ointment to knock this steady grower off its perch, you might think? But alas the extraordinary consistency in the top line is matched by the bottom line too, with operating income in the black for each quarter over the past decade.

Back in Q4 2013, revenues were reported at $324 million with operating income of $40.9 million. Fast forward ten years and the top line came in at $840.4 million with operating income of $182.3 million.

A part of this growth can be attributed to international sales, which have grown as the company expanded beyond its dominance in North America. Rollins now has a presence in 60 countries and international sales represent close to 10% of overall revenues, but notably has been increasing.

Another contributing factor to the top line growth has been management’s willingness to acquire strategically. In fact, Rollins has completed more than 40 acquisitions in recent years as it scoops up smaller pest control companies.

One of its largest purchases was of Northwest Exterminating in 2017, which bolstered its top line by approximately $50 million annually, and established a presence in the southeastern region of the US.

Those steady revenues and profits are music to the ears of conservative investors but is the company trading at an attractive price?

Is Rollins Stock Undervalued?

Rollins stock is 17.6% undervalued according to 9 analysts who have a consensus price target of $40.98 per share on the stock.

Running a discounted cash flow forecast analysis reveals a slightly more pessimistic price target of $34 per share, which would suggest that Rollins is not a steal at this time, and the 42.1x price-to-earnings ratio would tend to support that assertion.

Nonetheless, there is a lot to like about Rollins, including a sky high return on invested capital, which sits at 23.7%, indicative of the company’s wide moat.

Other attributes in its favor include a 1.68% dividend yield that has a 20 year growth streak, as well as two upward revisions from analysts recently.

Is Rollins Stock a Buy?

At a time in the world when interest rates have risen sharply, creating a drag on the economy, and war is brewing in various regions, a company that displays the qualities of anti-fragility as Nassim Taleb would describe them is increasingly attractive.

Rollins has already shown it is anti-fragile, meaning that it actually benefits from a shock, or in other words when the Great Recession hit, the pest control company grew revenues.

Now with sales slowing across the board at so many companies, Rollins has enjoyed accelerating revenue growth. So too has it received upward revisions in guidance from analysts, continued its 20+ year streak of dividend growth, sustained a high return on invested capital, and continued to report operating income in the black.

All that supports the thesis that Rollins stock is a buy at this time, a fact further confirmed by its valuation in the eyes of analysts, who rate it a Buy with over 17% upside potential.

Further tailwinds in the future will likely derive from international growth, a key focus area for management, as well as future acquisitions of smaller pest control players.

One additional, yet lesser known, strength Rollins enjoys stems from its employee training that has resulted in a remarkably low turnover rate for the industry. By investing heavily into staff, Rollins has been able to deliver better services, thereby impacting customer satisfaction and, ultimately, revenues.

Employee retention at Rollins is reported to be over 90%, and the company invests an estimated $2 million annually in employee training programs. The result has been higher quality of service that in turn has proven to be a critical differentiator that cannot easily be replicated by rivals.

Wrap-Up

Rollins is a highly attractive play at a time of uncertainty. Its combination of steady sales and profitability growth over the past decade have demonstrated its stability.

Another reason conservative investors have bought in is its 20-year streak of dividend growth, now sitting at 1.68% annually.

Combine those facts with the company’s high return on invested capital, and you end up with an investment opportunity that enjoys a wide moat with the potential to further expand.

Last but not least, analysts have a price target on the share price that sits over 17% higher than where the stock presently is. If you’re looking for a relatively conservative play that is accelerating revenues at a time when other stocks are slowing down, this might be just fit the bill.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.