Rollins, Inc. (NYSE:ROL) is a leading provider of pest and termite control services for more than two million residential and commercial customers, primarily located in North America. We believe that Rollins operates in an industry with high barriers to entry and a fragmented competitive landscape, and we believe Rollins should be able to consistently increase its market share over time. In North America, Rollins is the number one player in commercial and residential pest control and wildlife control, and the number two player in termite control. Developing a well-regarded national brand requires meaningful investment in sales, marketing, employee training and technology, which smaller players simply cannot afford.
Pests are a major headache for residential customers, and they can lead to meaningful business issues for commercial customers, like restaurants and hotels. Thus, customers are typically willing to pay for these services, regardless of how the economy is performing. As a result, Rollins has demonstrated impressive operating performance across all market conditions, including positive revenue growth during the 2008 and 2009 recession. Furthermore, Rollins has focused significant effort to improve its retention of employees and customers, which has led recurring revenues to represent approximately 80% of the company’s total.
We estimate that Rollins has just a 20% share of a large and growing addressable market. We think Rollins has several avenues for generating modest single-digit organic revenue growth, and believe it can supplement that growth with acquisitions. Industry price increases are estimated to be 1.5% to 2% per year, largely driven by the price insensitivity of customers. Commercial pest control volumes are likely to benefit from increasing regulation, with the Food Safety Modernization Act providing increased business opportunities in food and beverage segments. In addition, Rollins’ scale and financial resources should enable it to gain share by utilizing its brand building initiatives, internet search engine optimization capabilities, and BOSS, the company’s new customer and workforce management software platform. Furthermore, Rollins has expanded its product offerings into the wildlife, bed bug, and mosquito control segments. While smaller than the core business, we believe these markets represent high growth opportunities that can drive overall company growth as penetration increases. Moreover, Rollins can grow through international expansion, since international markets represented only 7% of 2015 revenue. Beyond organic growth, the company can leverage M&A to drive low-single digit incremental revenue growth. Rollins’ adjusted EBITDA margins are currently ~20%, but we believe that Rollins has the chance to grow EBITDA margins into the mid-20% range, through natural operating leverage, tight sales, general and administrative expense control, and the positive impact stemming from the new BOSS workforce management system.
The management team has impressive experience both at the company and in the pest and termite control business more generally. Moreover, the Rollins family has run the company for more than 50 years and still maintains greater than 50% ownership. We view the Rollins family ownership as an opportunity to invest alongside a controlling shareholder whose interests are aligned with ours.
From Baron Funds' Barron Asset Fund third-quarter 2016 commentary.
