Even during a pandemic you need to control pests, insects, and creepy-crawlies. Considering that Rollins (ROL -0.12%) stock is up 27.8% over the first six months of 2020, according to data provided by S&P Global Market Intelligence, it's clear that pest control was not one of the services that people were willing to give up during the COVID-19 outbreak.
Everything under one roof
One of the things that stands out with Rollins is that it's a serial acquirer, constantly buying more smaller businesses as it tries to roll up the pest control industry under its rather large and growing umbrella.
Image source: Orkin.
Best known for its Orkin and Western Pest Services brand, Rollins employs a "buy everything" approach to its business, which caused it to suffer its first miscues last year. The company started off 2020 reporting fourth-quarter results that missed analyst earnings expectations, despite beating on revenue.
The growth-by-acquisition strategy caused its expenses to rise as it needed to add more to its loss reserves, and that alone ended up swiping a penny per share from earnings.
Yet CEO Gary Rollins said he believed it was an anomaly, because after 12 consecutive years or reporting higher revenue and earnings, and 22 years of improving business prospects, "I've never seen so many one-time charges in my experience."
Rollins has proved itself capable of incorporating its acquisitions into the fold, but that's the thing with buying numerous companies -- it's never a problem until it's a problem.
A silver lining to a very dark cloud
Rollins was also hit hard by the coronavirus pandemic, causing its stock to lose about a quarter of its value as the closure of businesses and office space impacted the pest control leader. Commercial services make up 38% of its revenue, and while the cliche that opportunity is the flip side of crisis is overused, it actually applies to Rollins.
At the end of March, it launched Orkin VitalClean, a powerful disinfectant service for businesses to sanitize and disinfect hard, nonporous surfaces. While Rollins has used this disinfectant before to sanitize commercial facilities after pest removals, it began offering it more broadly to businesses due to the pandemic.
Rollins noted that no product has received Environmental Protection Agency approval for killing the COVID-19 virus because it's too new, but the disinfectant is effective against a long list of pathogens, such as other coronaviruses, including those that caused two other global outbreaks, swine flu and avian flu. It is also 100% effective against bacteria and viruses on hard, nonporous surfaces.
While Rollins thinks VitalClean can become an important part of its business, right now the launch has increased costs, with purchases of personal protective equipment and other disinfectant equipment. However, the service has already signed up its first major customer, the British Columbia transit system.
Basics still matter
Termite removal and mosquito control remain two of Rollins important businesses, and the first half of the year were prime seasons for the pests. First-quarter residential termite revenue, which accounts for 20% of the total, jumped almost 18% from the year-ago period as it experienced the fastest growth it has seen in six years, while its mosquito service also posted record-setting growth.
And Rollins hasn't let up on its spending spree, either, continuing to buy more companies, including the largest independent pest control provider in Australia. Rollins has a presence in 65 countries around the world.
Time to take a breather
Rollins stock has bounded 40% higher from the lows it hit in March, but it trades at 70 times trailing earnings and 55 times next year's estimates. It also goes for nearly 100 times the free cash flow it produces.
While Rollins also pays a dividend that has increased at double-digit rates for 18 consecutive years, it slashed the quarterly payout by 33% to $0.08 during the pandemic to strengthen its balance sheet and give it flexibility.
It says the move is temporary, and by the end of the year it may just be able to increase it above and beyond the level it set in January. But as solid as Rollins' business appears as consumers seemingly don't see pest control as very discretionary, its stock still looks overvalued at this price.
