Rollins Earnings: Robust Organic Growth Calms Investors’ Pest-Control Market Concerns

Rollins’ ROL strong third-quarter performance provided investors with a level of comfort that North American pest-control market conditions haven’t deteriorated sharply in recent months. The company delivered elevated organic growth of 8.4% year on year—largely according with our full-year 2023 organic growth expectations—outperforming the weak third-quarter North American result for wide-moat peer Rentokil Initial. Price increases more than offset inflationary pressures and worked in combination with operating leverage to continue widening Rollins’ operating margin, which rose 240 basis points to 22.3% in the third quarter and thus was tracking modestly ahead of our prior expectation for 2023 EBIT margin progression.

We have lifted our 2023 EBIT forecast to $617 million and our EPS estimate to $0.93, representing respective increases of 3.5% and 4.5%. In turn, the combination of the modest upgrade to our near-term operating margin assumption and a time value of money adjustment leads us to lift our fair value estimate by 5% to $32.50 per share.

Rollins’ robust organic growth relieved investors; the stock was up 8% at the time of writing after having fallen sharply in response to the recent trading update from Rentokil. Still, with Rollins’ stock down some 22% since late July, we think investors’ expectations for the wide-moat company look far more reasonable than they have for quite some time. Indeed, we think Rentokil’s recent soft trading update—for greater detail, see our Oct. 19 note “Rentokil Initial: Shares Appealing as Weak Pest Control Sales Offer an Attractive Entry Point”—has acted as a reminder to investors that organic growth delivered by Rollins since the coronavirus pandemic is elevated and has outpaced historical norms by a substantial margin.