Pest control expert Rollins (ROL +1.12%) had an enviable record of 12 consecutive years of higher quarterly revenue and profits, but that streak came to an end last year when it missed earnings twice in a row. Its growth-by-acquisition strategy was catching up to the owner of Orkin and Western Pest Services as the addition of ever more companies to its roster required it to spend more on professional services such as IT to bring them into the fold.
Rollins seemed to get back on track again last quarter, as revenue and profits resumed their twin rise, but it just reported fourth-quarter 2019 earnings and it seems buying up businesses is still exacting a bit of a toll.
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Another small slip
The nemesis of termites, roaches, ants, and all things creepy-crawly said revenue jumped 13.8% during the period to hit $506 million, generating net income of $50.8 million, or $0.16 per share, which was flat with last year.
Rollins said profits didn't rise this year because it had to increase its casualty reserves, which ended up swiping about a penny per share. Because the company is self-insured, it is required to carry certain letters of credit to secure workers' compensation and casualty insurance contracts coverage.
As it buys up more companies, these costs grow, and the acquisition of Clark Pest Control last year, the eighth largest pest control company and the biggest in Rollins history, helped cause an increase in premiums -- leading Rollins to increase its reserves for accidents and injuries.
One record that continues growing unabated, however, is Rollins' history of raising its dividend. Prior to the earnings announcement, the pest control leader said it was hiking the payout by 14% to $0.12 per share. It marks the 18th consecutive year Rollins' board has increased its dividend by at least 12%.
Swallowing the competition
While Rollins has been rolling up the pest control industry under its umbrella, it still has been able to notch strong organic growth. That means that while the number of businesses it owns contributes ever greater amounts of revenue to the total, even as they age they're still doing good business.
Although acquisitions accounted for most of the revenue growth this quarter, the remainder was still up 5.7% due to pricing and organic growth. Rollins acquired 29 businesses in 2019 compared to 38 the year before, and it's not likely to stop anytime soon.
CFO Eddie Northen said in the earnings release, "We continue to invest in innovative technology as well as seeking out strong acquisitions that fit well into the Rollins family of brands."
Pest control is still a highly fragmented industry, which gives Rollins a chance to continue its spending spree, and so far it has proved adept at folding the companies it buys into the parent.
Bugs will always be with us
Still, most of the time these are very small businesses and won't hurt Rollins even if they fail. Although the multiple paid for Clark Pest Control was slightly higher than what Rollins typically pays, Rollins President and COO John Wilson told analysts, "we want to maintain discipline in our approach."
And as we move out of the winter months and into warmer spring weather, a time when insects become more active, Rollins will find its services in greater demand. It's looking for its mosquito business to be a particularly big opportunity. The business has been growing for three straight years and was up 30% in 2019, more than offsetting the decline experienced in bedbugs.
The last year was somewhat unique for Rollins, and chairman and CEO Gary Rollins said he's never seen a year like 2019 where there were so many one-time charges. He also said it was "the most disappointing year we have had for 22 years," but he believes it was a one-off period, with the business rolling higher in the future.
