In the fall of 2007, I awoke to what wasn't just a nighttime blessing. The bedbugs that were crawling across me were more like a nightmare. But the growing epidemic of bedbugs provides an interesting opportunity for investors looking to sleep easy at night.

Once thought to be a problem of the past, bedbugs are real, and they're back. Reports of bedbug infestations in New York City are up 1,900% since 2004. And that city is where upscale clothier Abercrombie & Fitch (NYSE: ANF) recently got bitten by the dreaded bedbug. It might be even worse in Cincinnati, where 1 in 5 residents have dealt with bedbugs.

Industry makeup
The $8.7 billion pest control and extermination industry is highly fragmented. Small, private, and independent pest-control companies dominate the landscape. Three companies account for the largest slice of the U.S. pie: privately held Terminix, Ecolab (NYSE: ECL), and Rollins (NYSE: ROL). It also competes with U.K.-listed Rentokil (LSE: RTO).

As recently as 2006, Terminix was the industry leader, capturing 19% of the market. That has changed. Rollins and Terminix are in a virtual tie, hovering around a 12%-13% market share each. Ecolab comes in a distant third with a 5.3% market share.

My pick for the most likely to profit: Rollins. Rollins built itself by buying small pest companies and allowing them to operate with relative autonomy. Their ranks include larger businesses such as Orkin and Western Pest Services as well as several smaller firms such as HomeTeam Pest Defense and Crane Pest Control.

A competitive advantage
There are two reasons Rollins is more likely to profit from this trend than its competitors and take a larger piece of the pie from mom-and-pop companies:

  1. Focused and distributed learning: Rollins has leveraged its network. It has an internal team shamelessly stealing best practices from its family of companies in the fight to defeat bedbugs. Since bedbugs have been off the radar for so long, many companies don't have standard exterminating procedures.
  2. Increased advertising: As this bedbug crisis continues, Rollins will be able to provide its subsidiaries with deeper pockets for advertising than their local competitors can afford.

Rollins' base of repeat customers could balloon from positive experiences with its companies in getting rid of bedbugs. I paid a Rollins' company (Western Pest) $600 to get my small condo taken care of. Now, they're the first call I make when I see anything amiss. And in the end, building the base of repeat customers is where the real money lies.

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