Is it possible to find quality companies without long-term debt? A recent search with the All-In-One screener at GuruFocus pulled up 12 companies with 5-Star Predictability ratings and no debt. Just 12 out of the thousands of stocks followed by GuruFocus.
One of them is Rollins Inc. (ROL, Financial), a company that some might recognize as the owner of Orkin and the Orkin Man brand, the people to call when pests or termites come calling at homes or businesses. In addition, it owns several other businesses and brands, on several continents, all specializing in pest, termite or wildlife control.
The company calls itself recession resistant since neither homeowners nor business owners can live with cockroaches, mice and other pests. It breezed through the financial crisis of 2008 and beyond, without a pause in top or bottom line growth.
Perhaps because of this and a dose of good management, many indicators point to overvaluation. Still, as this 10-year chart shows, the share price has steadily risen.
What are the pros and cons of buying Rollins, Inc.?
History
Rollins can trace its operating lineage back to 1901, when Otto Orkin, “The Rat Man,” began selling poison door to door. It continued and grew as an independent until 1964, when it was bought by Rollins Broadcasting Inc., a network of radio stations.
Rollins was diversifying its holdings, and in what’s believed to be one of the first leveraged buyouts, it made an offer for Orkin, a company seven times its size. That bid succeeded, and the fast-growing company went public on the New York Stock Exchange in 1968.
In 1984, founder Wayne Rollins split the company into three separate firms, with Rollins Inc. taking the pest control business while other companies took the broadcasting operations and an oil and gas unit. With a focus on just one sector, the pest control business has grown internally and actively acquired other companies in the same field. That includes the purchase of Trutech Wildlife Services in 2010, which allowed it to broaden its reach in the field of pest control.
Rollins now generates more than $1.5 billion in annual revenue and has a market cap of more than $7 billion.
History is based on information at the company website and FundingUniverse.com.
Rollins’ business
The company operates seven major and several smaller subsidiaries, all of which focus on pest and termite control. The biggest and best known of them is Orkin LLC, which Rollins says is the world’s biggest pest and termite control company (unless otherwise noted, information comes from the company’s 10-K for 2015).
This excerpt from the Nov. 7, 2016 Investor Relations Presentation shows the companies and brands owned by Rollins.
All these businesses come under one reportable segment, and the company reports that it does not rely on a single customer or a few. It operates both domestically and internationally:
- U.S. and Canada: 700 locations.
- International: 200 locations (data from the Investor Presentation).
These locations handle more than 2 million residential and commercial customers.
Rollins adopted Total Quality Management in the late 1980s (FundingUniverse) and has continued with it. Ongoing goals include:
- New service and product line offerings.
- Expanded customer base.
- Increased customer retention and satisfaction.
- Improved productivity and reduced operating costs.
- Continuous financial improvement.
Revenues
This chart shows how the company’s revenue has grown over the past 25 years.
Note that revenues continued to grow during the 2008-2009 financial crisis.
GuruFocus reports the company’s three-, five- and 10-year average revenue growth rates as:
- Three-year: 5.5%.
- Five-year: 5.8%.
- 10-year: 7.2%.
This slide from the Investor Relations Presentation shows the sources and retention rates of revenue lines:
The company considers retention rate to be among its most important metrics.
Competition
Rollins says it “competes favorably” in the industry and lists competitive factors as “quality of service, customer proximity and guarantee terms, reputation for safety, technical proficiency and price.”
In its Investor Relations Presentation, the company names three publicly traded competitors: Ecolab Inc. (ECL, Financial), ServiceMaster Global Holdings Inc.Ă‚ (SERV, Financial), which owns Terminix, and Rentokil Initial PLC (LSE:RTO, Financial).
The GuruFocus table shows how it compares on several metrics with Ecolab and ServiceMaster.
Ecolab is a more diversified company, which develops and markets cleaning and sanitizing products and services. ServiceMaster is also a more diversified company; it competes in pest and termite control through Terminix.
But these big companies don’t have the industry to themselves. As Rollins notes in its Investor Presentation, the industry is “Highly fragmented with numerous small operators”.
Moat
Morningstar assigns a rating of Wide Moat to Rollins. Vuru comes to much the same conclusion:
Rollins makes claim to a strong competitive position in a broader context:
Growth
As noted above, revenue has grown steadily over the past decade (as have the bottom line metrics, to be discussed in a later section).
Looking ahead, it seems likely bugs and beasts that drive this industry will continue to appear where they’re least wanted. For example, bed bug revenue has nearly tripled between 2010 and 2016.
In the Commercial segment, the company says it has 20% of the market and that the segment is growing because of increasing health and safety concerns. The focus is on five key sectors that have, or should have, zero tolerance for pests: food and beverage processing, health care, foodservice, food retail and hospitality.
In Residential, there is increasing concern about personal health and safety as well as protecting property; consumers are better informed; and the Internet is providing opportunities to reach and convert new prospects.
As noted, Rollins enjoys high levels of customer retention, and 80% of its revenues are recurring.
Its internal growth plans include:
- Internet lead development.
- Increased yields from all brands.
- Enhanced targeting of higher-income customers.
The company also plans to keep growing through acquisitions, an area in which it has expertise and experience.
Other
Rollins is headquartered in Atlanta. Its year end is Dec. 31.
At the end of 2015, it had 11,268 employees.
The common stock underwent a three-for-two stock split on Feb. 10, 2015.
Chairman of the board: R. Randall Rollins, age 84.
Vice chairman of the board, CEO: Gary Rollins, age 71.
President, chief operating officer, director: John Wilson, age 58; he has held this position since 2013.
Chief financial officer, vice president, treasurer: Paul Northen, age 51, has been CFO since 2016 (officer information from Reuters.com).
Ownership
Shares of Rollins are owned by six of the gurus followed by GuruFocus. Mario Gabelli (Trades, Portfolio) has the biggest holding with 3,858,950 shares, representing a 1.7% share in the company. Columbia Wanger (Trades, Portfolio) and Jim Simons (Trades, Portfolio) hold the second- and third-largest number of shares among the gurus.
Most notable about ownership is the size of the float:
Family owns the majority of shares. The company reports, in its 10-K, "Rollins Inc.’s executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, approximately 56% of the company’s outstanding shares of common stock."
This GuruFocus table shows the holdings of the top five insiders:
Three of the top five insiders are family members; Henry B. Tippie is a former company executive and one of the team involved in the leveraged buyout of Orkin; Wilson is Rollins' president.
Institutional investors hold a significant number of shares, and shorts have more than a 10% stake in the company. The high number of short sellers may reflect current valuations, which will follow.
By the numbers
Financial strength
Few companies receive ratings as good as these from GuruFocus:
For a start, the company has no long-term debt. Many value investors prize this characteristic, a rare characteristic in an era of low interest rates because it means the company is unlikely to go broke.
Revenue, as we’ve seen, has been headed upward and even kept moving up during the last decade’s financial crisis. It is a strong defensive stock.
Earnings have grown along with revenue, as this 10-year chart of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) shows:
The same holds for EPS (earnings per share).
Free cash flow is also a growth item, although less consistently than revenue or earnings.
These metrics have been helped along by a growing operating margin. GuruFocus reports average annual operating margins of:
Finally, note that the Weighted Average Cost of Capital (WACC) is 3.10% while the Return on Invested Capital is 39.06%.
Valuations
Despite these results, none of the major valuation indicators at GuruFocus show the company at an attractive price.
One of those valuations, the Discounted Cash Flow calculator, brings in a price that’s far below the current price:
To go with that, the price-earnings (P/E) ratio has just pulled back from a 10-year high.
And the PEG (Price/Earnings divided by five-year earnings growth) just keeps going up as well.
For the analysts followed by Nasdaq.com, the price is also too high. Their 12-month consensus target is $32.00, $1.34 below the close on Jan. 23. Despite that price target, they are mildly bullish on the stock.
One more perspective
This chart shows a 10-year price chart (in green) with the 200-day Simple Moving Average (in red).
Conclusions
Rollins is a 5-Star predictability stock, putting it among the elite by consistently growing its earnings. It’s a company with no debt, and metrics that would be the envy of just about every other company. It should perform well even if the market takes a dive; cockroaches never take a holiday.
Those same metrics have led investors to bid up the price of the company, well beyond what many observers and analysts believe is fair valuation.
Rollins is no doubt a high-quality company with no debt and worth serious consideration at a lower price. Investors who consider it overpriced and due for a correction will want to put it on their watchlists. It should also make the shortlists of growth-oriented investors with a long time horizon.
Disclosure: I do not own shares in any of the companies listed here, and do not expect to buy any in the next 72 hours.
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