Pest-control expert Rollins (ROL 0.52%) returned to growth in the third quarter, recording higher revenue and higher adjusted earnings once again.
The owner of pest-control services Orkin, Western Pest Services, and others had previously enjoyed a 13-consecutive-year run of posting higher sales and profits every quarter than the year before, but in 2019, the streak came to an end. The company missed earnings in the first quarter then repeated the failure in the second. But Rollins' third quarter saw it regain its stride.
Image source: Rollins.
A return to its winning ways
Rollins reported revenue jumped 14.1% to $556.5 million during the period on organic growth of 6.4%. While GAAP earnings of $0.13 per share was well below the $0.20 per share it generated in the year-ago quarter, adjusting for expenses associated with having terminated its pension plan, which it warned about last quarter, it was able to beat last year's effort by $0.02 per share. It's going to take another earnings hit in the fourth quarter related to the pension termination.
Year to date, the bug buster's revenues are running almost 10% higher, while net income is essentially flat and earnings stand at $0.55 per share. Rollins doesn't offer quarterly or full-year guidance, which has tended to cause its actual results to fluctuate from analyst projections, but Wall Street is calling for the Orkin Man to post a 10% rise in revenue for 2019 to $2 billion, with earnings of $0.68 per share coming up short of last year's $0.70 per share. Analysts do expect it to return to growth in 2020, with per-share profits expanding 16%.
A knack for getting business done
Rollins' results show that the growth-by-acquisition model it has adopted to roll up the pest control industry under its roof continues to pay off, because as the businesses become integrated, their operations accrue benefits to Rollins.
That 6.4% increase in organic growth has come as Rollins acquired more than 50 businesses in the past year and a half. The rate of organic expansion also accelerated over the first two quarters of 2019, which grew at only around 3.5% in each quarter.
That means that as Rollins laps its acquisitions, they're contributing more to its performance. Since it really went on a spending spree in the back half of 2018, acquiring 24 businesses during that time, there's a good chance the amount they will be injecting into organic growth come Q4 will be even greater.
Rollins vice chairman and CEO Gary Rollins said in a statement, "We remain confident in our strategy and action plans, and are working hard to grow the business both organically and through strategic acquisition."
How should investors react?
Yet the return to form Rollins has achieved doesn't mean investors should go out there and buy its stock just yet. At roughly 52 times trailing earnings, an 8% growth rate, and a dividend yielding less than 1.2%, Rollins stock looks pretty pricey to me right now.
It's the biggest player in the pest-control space, and while it will continue to add new businesses to its roster through acquisitions, as it grows in size, the chance for any one of them to be transformative lessens. Growth is undoubtedly in the cards for Rollins, but for investors, it should not come at any price.
