Why Should You Invest in This Pest Buster?

For those who have had to deal with termites and rodents at home, you will understand why pest control services are so important and how their providers make money. Rollins is one such pest-busting company and also happens to be a good investment candidate.

Apr 23, 2014 at 3:32PM

Source: Rollins

The best investment opportunities are often found in everyday life. If you have ever had to call in a pest buster to get rid of the pesky rodents and insects running around your house, you aren't alone. The 'essential must-have' nature of these pest-control services means that their providers have stable and resilient revenues.

One example is Rollins (NYSE:ROL), the largest pest and termite control company in the world, which provides its services to over two million customers from more than 500 locations across the globe. It has achieved positive earnings and free cash flows in every single year for the past decade. Rollins shares similar characteristics with other successful companies such as death-care stock Service Corporation International (NYSE:SCI) and soda company Coca-Cola (NYSE:KO).

Recession resistance and recurring revenues
Rollins generates approximately 70% and 30% of its revenues from residential and commercial customers, respectively. In regard to its residential business, consumers tend to view pest control services as non-discretionary. While a homeowner can choose to defer the purchase of new furniture and electronic appliances, the decision to leave pests running around a home results in potential health and property risks. Rodents can potentially spread diseases, while termites will damage a home.

Commercial customers simply have too much at stake to risk destroying their reputations and brand equities by relying on generic pest-control products. For example, in some industries such as food & beverage processing and food retail & hospitality, pests could potentially increase the risk of food poisoning. As the top commercial pest-control provider in the U.S. with 20% market share and a nationwide service network of more than 50 branches, Rollins claimed that it has historically experienced high customer retention rates.

Similar to Rollins, the country's largest death-care player Service Corporation boasts a recession-resistant business. During the decade that ended in 2010, the number of deaths in any single year hasn't fluctuated by more than 3%. Service Corporation has been a key beneficiary of the recession-proof nature of the death-care business, as it has remained profitable and free cash flow positive in every year of the past 10 years.

The company is the market leader in the North America funeral and cemetery industry with a national footprint of 1,644 funeral service locations and 514 cemeteries. Following the completion of its acquisition of Stewart Enterprises in December 2013 for about $1.5 billion, Service Corporation now has an estimated 16% market share in the industry. As one in four Americans  will be 60 or older in 2030, this company is the best positioned to benefit from an aging America.

In addition to the 'essential' nature of Rollins' services, its high recurring revenue level of 80% is also another positive factor. Pest control services usually recur on a monthly, bi-monthly, or quarterly basis. For example, Rollins' hotel customers will need regular inspection and remedial services to make their rooms free of bed bugs.

Rollins isn't resting on its laurels and it is working hard to add new recurring revenue streams. Rollins' subsidiary HomeTeam Pest Defense has partnered with the country's major home builders to install more than 80,000 TAEXX ("Tubes in the Wall") systems. TAEXX is HomeTeam Pest Defense's proprietary built-in pest control system and the 80,000 TAEXX systems will act as a strong installed base for future recurring revenues.

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Source: Rollins

Brand power
Rollins' flagship brand Orkin is synonymous with pest control, as it has a long history that spans more than a century. According to the company's internal surveys, Orkin is the most well-known pest control brand in the U.S. with 70% brand awareness. Another validation of the strong brand equity associated with Rollins and Orkins came from the mass media. The producers of CBS's Undercover Boss invited John Wilson, President of Rollins, to participate in the show.

Rollins hasn't stood still and it continued to invest in building its brand. It is estimated that Rollins spends 5% of its revenue every year to grow and preserve the brand. One such initiative was a new marketing and rebranding program in 2013 to reiterate that fact that Orkin's pest-control expertise is grounded in science and technology. 

The true test of a strong brand lies with its revenue stability and pricing power. Rollins passes both tests with flying colors. Firstly, it increased its revenues in every single year from 2004 to 2013, notwithstanding the global financial crisis in 2008-2009. Secondly, Rollins' pricing power is reflected in the fact that it has maintained its gross margins within a narrow 47%-49% range for the past decade.

Another example of such an iconic brand is Coca-Cola. It has exhibited exceptional market share stability over time. For close to three decades since 1986, Coca-Cola's market share has consistently remained above 40%.

Although the carbonated soft drinks, or CSD, market continued to experience declining volumes in 2012 and 2013 as a result of increased consumer health-consciousness, Coca-Cola has outperformed the overall CSD industry. While CSD volumes fell by 3% and 1.2% in 2013 and 2012, respectively, Coca-Cola witnessed less severe volume declines of 2.2% in 2013 and 1% in 2012. Coca-Cola also gained market share over its rivals during this period. Coca-Cola's resilience is a function of the strong brand recognition that it enjoys.

Foolish final thoughts
Rollins delivered record financial results in 2013 as it grew its top line and bottom line by 5.2% and 10.8%, respectively. The fourth quarter of 2013 also represented the 31st straight quarter in which Rollins has increased its earnings. The recession-resistant and recurring nature of Rollins' revenues and its strong brand name suggest that such excellent results are not flashes in the pan. Going forward, Rollins should continue to grow its business via new customers, new franchises, and mergers & acquisitions.  

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Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. The Motley Fool owns shares of Coca-Cola and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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