Rollins Inc. (ROL, Financial) is one of the world’s largest pest control companies with over 2 million customers in the U.S. The company has posted steady revenue growth for each of the past 10 years and is poised to do the same this year if results for the fourth quarter match its performance for the first nine months.
In a similar fashion, Rollins' stock price performance has matched its steady revenue growth with only a few noticable pullbacks and rebounds over the past decade. The stock is up 194% over the past five years, whereas revenue has increased 31% over the same period.
The company’s high price-earnings (P/E) ratio of 54.1 times makes the stock look a little bit too expensive for those looking to make their first investment in the company. The P/E ratio is up 71% over the past five years, but has exhibited some major pullbacks and rebounds as compared to earnings.
Rollins' stock price of $45.60 at the time of writing reflects a P/E ratio of 54.1 times.
As noted earlier, revenues have been increasing steadily over the past several years. What investors should know, however, is the incremental growth has been very small (mid-single-digit) on a year-over-year basis, which is demonstrated by the 31% increase over a five-year period.
Nonetheless, the increase in the bottom line has been more significant with a total rise in EPS of 67% over the same period, but this was boosted this year by earnings tied to tax benefits.
Nonetheless, the EPS growth rate of 67% over the five-year period is a near match to the change in P/E ratio. Rollins highest P/E ratio over the past 13 years is about 56 times, while the lowest was about 22 times. The company’s median P/E is 31 times, which means the current level of 54 times is on the higher end of the two extremes.
This potentially implies that unless the company continues to post an improvement in its bottom line, Rollins stock price could be about to retreat significantly. Its low sales growth rate is also a likely downside going forward.
Some of the company’s close rivals include SenesTech Inc. (SNES, Financial) and ServiceMaster Global Holdings Inc. (SERV, Financial), but they are not pure-play pest and termite control companies. However, Rollins also faces competition from several privately held companies across its several business units.
For instance, Miller's Pest Control Omaha NE is a Nebraska-based pest and termite control startup and one of the several privately held companies looking to disrupt the pest control market through localization. According to reports, consumers are prioritizing local brands when it comes to service delivery because they are more flexible in providing customized services as compared to the more rigid multinational organizations.
These private companies may go unnoticed as investors focus on publicly traded companies, but they are providing a unique challenge to Rollins' flagship brands in the U.S. and internationally. The few listed companies may not pose a direct challenge due to their diverse portfolios and, therefore, might only come in handy for purposes of analysis.
From a business perspective, however, Rollins' main obstacle that has been gagging its revenues could be the small, local suppliers that most analysts might dismiss as insignificant. When you add their collective impact together, then the total could be huge.
The pest and termite control industry has the makings of a defensive industry because, regardless of whether there is a recession or not, pests and termites have to be kept in check. This can be illustrated using Rollins' revenues, which grew even during the global financial crisis of 2008-09.
This could be another reason why investors find the stock to be attractive even when trading at high P/E ratios. While its dividend yield of about 1% may not appeal to some investors, the company has increased the dividend paid for each of the past 13 years. It has an annualized dividend growth rate of about 18.6% for the past three years and last year increased the amount by 25%.
These are characteristics of a good dividend stock and could be useful in complementing an increase in the stock price.
Conclusion
While Rollins may not appeal to most value investors, when you look at the company’s historical performance, including dividend growth, revenue growth and net income, then these might be good enough to turn a few heads as we approach the end of the fiscal fourth quarter.
Disclosure: I have no positions in any stocks mentioned in this article.
